We are reviewing an offer from a search fund buyer who matches our valuation expectations but relies on a complex network of passive equity investors to fund the close. How do we structure the letter of intent and due diligence milestones to protect ourselves from their funding risk?

Question

Tyler Smith · Accepted Answer

Search fund buyers can offer competitive multiples, but their capital structure introduces significant execution risk because they must secure final equity commitments from their investor network after signing the Letter of Intent. To protect your business from being tied up in an exclusive period that leads nowhere, you must structure strict financial and operational milestones.

First, demand a bifurcated exclusivity period. Instead of a standard ninety-day exclusivity lock, offer a thirty-day initial period. This initial period should only extend if the buyer provides written proof of soft-circle equity commitments from their primary investors.

Second, negotiate a meaningful break-up fee. If the buyer fails to close because their investor network backs out, they must pay you a pre-determined break-up fee to compensate for your time, expenses, and operational distraction. This forces the searcher to qualify their investors before signing the Letter of Intent.

Third, require direct communication with their lead investors. Do not rely solely on the individual searcher. Ensure your advisors can speak with the key decision-makers who are actually funding the check.

Keep your business running smoothly during this process by maintaining your weekly Level 10 Meeting discipline. Do not let your leadership team lose focus on their Rocks. By treating the search fund's milestones as strict operational deliverables, you protect your valuation and keep the transaction moving forward on your terms.