Industry
Part of Buyer search: from criteria to letter of intent
Buyer search rules: four sources and who enforces each
Buyer search rules sorted by who enforces them: the law, the agreements you sign, the market conventions that decide who gets shown deals, and your own discipline.
Nobody hands a buyer a rulebook. Buyer search rules come from four places: law, contracts you sign along the way, market conventions no one writes down, and rules you set yourself.
Buyers get into trouble by mistaking one kind for another, usually by treating a convention as optional or a contract as formality.
What to take away
- Sort every rule by who enforces it. A rule enforced by a court, a rule enforced by a signed agreement, and a rule enforced by a market that stops returning your calls are different things and need different care.
- The contract you sign most often in a search is the confidentiality agreement. Read it every time; the standard form is not standard.
- Where a rule is a matter of state law, this page does not tell you what it says. It tells you which body to ask.
Rules the law enforces
The law touches a search in fewer places than buyers expect, and in each of them the detail is local.
Legal Rules for Buyer Search
- Intermediary licensing and fees
- Confidentiality agreement terms
- Approaches to staff, customers, suppliers
- Deal structuretax, employment, licensing
Who may act as an intermediary, and be paid for it. Some states license business intermediaries, in some cases under real estate rules, and some do not. Florida, for instance, brings the sale of business enterprises inside its real estate broker definition. Whether the person introducing you to a business is allowed to take a fee on the sale is a question for the state's licensing authority and your lawyer. Do not take the intermediary's word for it.
What you may do with information. Once you sign a confidentiality agreement, its terms are enforceable. Before that, general law still applies to misuse of information, and misrepresenting yourself to get a package is a bad start to any transaction.
Approaches to staff, customers and suppliers. Whether you are permitted to contact them is almost always governed by the confidentiality agreement you signed, and after a letter of intent by that letter. The consequences of a breach are contractual. Treat them as real.
The deal itself. Once a structure is chosen, tax, employment, licensing and sometimes securities rules all apply, and which ones depends on how the deal is built. The deal structures page describes the choices; the consequences of each are for your accountant and lawyer, which is one of several reasons that a purchase of this size warrants an intermediary, an accountant and a lawyer rather than any one of them.
Rules the contracts enforce
The confidentiality agreement. It is the first thing you sign for every listing, and it accumulates. Each one binds you: on what counts as confidential, on how long, on whether you may approach staff and customers, on whether your advisers and lenders are covered, and often on non-circumvention, which ties you to the intermediary for any future dealing with that seller. Buyers who sign a dozen without reading them discover, months later, that they cannot approach a business directly because they once saw it through a broker.
Contract Rules by Document
Confidentiality agreement
- Binding parts
- All terms
- Duration
- Accumulates
- Key risk
- Non-circumvention
- Who is bound
- Buyer
Letter of intent
- Binding parts
- Confidentiality, exclusivity
- Duration
- Mostly non-binding
- Key risk
- Re-trading reputation
- Who is bound
- Buyer and seller
Engagement letters
- Binding parts
- Fee terms
- Duration
- As agreed
- Key risk
- Fee triggers
- Who is bound
- Advisers and intermediary
The letter of intent. Mostly non-binding, except for the parts that are, which are usually confidentiality, exclusivity, and sometimes cost-sharing. Know which clauses bind before you sign, and remember that the seller is relying on the non-binding parts too. Re-trading a price after the letter, without a diligence finding to justify it, is not a breach of anything. It is simply how buyers acquire a reputation.
The engagement letters. With your own advisers, and with any buy-side intermediary, the agreement is the rule. What triggers a fee, on what base, for how long, and on which businesses. The seller's intermediary is bound by an agreement too, and it is worth knowing that their duties run to the seller, not to you.
Rules the market enforces
No court enforces these. A market with a small number of active intermediaries does, by deciding which buyers get shown the good packages.
Market Conventions Buyers Must Follow
- Go through the intermediary
- Provide checkable proof of funds
- Respond within days
- Do not shop the package
- Do not make unfundable offers
- Stay inside stated criteria
The conventions are simple to state and easy to break:
- Answer an intermediary promptly and say plainly when a business is not for you. A buyer who goes quiet is quietly dropped from the next mailing.
- Be ready to show how the purchase would be funded. Intermediaries put buyers who can explain their funding ahead of buyers who cannot.
- Keep what you were shown to yourself and your advisers, even where the agreement would let you say more.
- Do not re-trade the price after a letter of intent without a diligence finding behind it. Intermediaries remember who did.
The intermediary holds the seller's interest, and where the seller cannot see what the intermediary is doing there is a standard principal-agent problem between them. It is not yours to solve, but it is worth understanding, because some intermediary behavior toward buyers is explained by it.
Rules you set for yourself
These are the ones that make the search work, and the only ones nobody else will enforce.
- Written criteria before the first callsector, size, location and the role you will play after closing. A business outside them gets a polite no, however good the package looks.
- A log of every confidentiality agreement you sign, with the business it covers and any non-circumvention term, so you know which owners you may not approach directly.
- A time limit for the search, and a date on which you review whether the criteria still make sense.
Self-Imposed Buyer Search Rules
- Written criteria before first listing
- Log every business seen
- Walk-away position before negotiation
- No diligence spend before funding test
- Diligence scope starts with deal-enders
One buyer category has formalized this. A search fund is a structure where investors back an individual to search full-time under written criteria for a fixed period. Its conventions are a useful model for any buyer, whether or not the structure suits you.
