Searchers paying finder's fees to other searchers: legal gray area or fine?

July 26, 2021

by a searcher from Harvard University in Boulder, CO, USA

I really like the idea of searchers offering deals they passed on to the broader community. This can be very valuable to a fellow searcher particularly when the deal is proprietary. I often have to say no to companies that other folks might love (e.g. companies dependent on veteran-owned small business set-asides but I'm not a veteran).

I think it makes sense to have a finder's fee arrangement in such a situation, mainly to incentivize folks to take the time required to pitch an opportunity to the community and then craft / coordinate a warm intro. My understanding is that paying this fee only on successful close is the norm because a) most searchers are cash-poor and b) the opportunity is only lightly due-diligenced at this point so could easily be a dead end, and therefore paying for it before closing/due diligence seems unfair.

So far I've signed 2 such finder's fee agreements to get company information, and have offered one deal myself.

My concern: a contact of mine raised a red flag that paying transaction-based compensation is a hallmark of broker-dealers (based on SEC guidance) and therefore it is important to only enter into such contracts with registered brokers.

If this is the case, doing a searcher->searcher finder's fee arrangement is .... not enforceable? A bad idea? Not sure. Do others have experience with this / perspectives on this?

Reply by a professional
from Fordham University in Houston, TX, USA

Hi Kendall, for an asset sale, paying a finders fee is generally not a problem. If the transaction is structured as an equity deal, then the terms of the deal and your involvement in it must fit certain criteria, known as the M&A brokers exemption. You can find the list in the SEC no-action letter: https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers###-###-#### pdf, but you should consult an attorney before entering into any arrangement to make sure you would be properly relying on that exemption.

Reply by a searcher
from University of California, Berkeley in Bend, OR, USA

I don't think it's a legal gray area. To answer Patrick's question, I've seen quite a few "finders" asking for a fee using the Lehman formula, which on a deal we were looking at worked out to just over 1.5%. That said, I hope Searchfunder.com doesn't become a community of finders fees. The search fund I intern for has passed dozens of deals along to our fellow searchers simply because it didn't work for us any maybe it will work for someone else. Also, there is a veteran's mastermind group on here where deals get passed along continuously, with no other motive. Just my two cents.

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