What is a finder’s fee? When used correctly, finder’s fees benefit all parties involved. Often, without an intermediary earning a finder’s fee, a transaction between two parties would not occur. This post explains what a finder’s fee is, how it works, and includes a finder’s fee agreement sample.

Finder’s Fee Meaning

A finder’s fee, also known as a “referral fee” is a way for one party to compensate another for a referral. The earner of the fee, or “finder,” typically provides an introduction of two parties (often a buyer and a seller) who did not previously know each other. Because the introduction is potentially valuable to at least one party, one or both of the parties are willing to pay a fee for the introduction. Hence the term Finder’s Fee.

Most finders’ fees are contingent upon some event or transaction actually occurring. In other words, the finder is not compensated until/unless the parties find the introduction valuable and complete a transaction. Upon the official transaction, the finder earns the fee.

Finder’s Fee Agreement

While it is possible that a finder could have a verbal arrangement with another party, they are usually documented in a written contract. For example, if you have a friend who would like to sell his mint condition 1972 Chevrolet Corvette, he might agree to give you a $5,000 finders fee if you bring him a qualified buyer and the transaction closes. A transaction like this might be a handshake agreement and there is no need for a written contract. On the other hand, if your neighbor wants to sell his $100 million company, and you know a potential buyer, finalizing the terms of your engagement in a written contract is an important step in the process.

Who Pays the Finders Fee? The Buyer or the Seller?

Either one! The Finder typically enters into a contract (“Finders Fee Agreement”) with either the buyer or the seller. In rare cases, the Finder might enter into a contract with both the buyer and the seller.

What Is Included in A finder’s Fee Contract?

Please see the sample Finder’s Fee agreement at the end of this post. A finder’s fee contract includes key provisions including but not limited to:

            Names of all parties involved

            Length of the contract

            What services are being provided and what has to occur for the fee to be earned

            Confidentiality and non-circumvention

            How is the fee calculated and paid

How are Finders Fees Calculated

Finders Fees are negotiated between the parties in the agreement. The fee is generally aligned with the value of the introduction and the value of the transaction. When selling a business, the Finder’s Fee is frequently based on the Lehman Formula. See the example below for a Fee Agreement that utilizes the Lehman Formula.

Does Private Equity Pay Finders Fees

Yes! Private equity firms regularly enter into buyer paid fee agreements that are are paid upon a successful transaction closing.

Finder’s Fee Agreement Sample

Note: This is an example of a Finder’s Fee, and it is not intended for your use. 1719 Partners is not providing legal advice. This sample agreement uses a Lehman formula.

This Fee Agreement (“Agreement”), dated as of [insert date here], sets forth the terms and conditions upon which [insert finder name or legal entity here] (“Finder”) shall act as non-exclusive finder for [insert buyer or client name here](“Client”) and/or its assigns for two (2) years from the date hereof (“Term”).  In such capacity, Finder shall introduce representatives of the Client to the owners and senior executive officers of [insert target company name here] (“Target”)and shall obtain and provide information regarding the business affairs and prospects of Target, including detailed financial statements and any other information reasonably requested by the Client, in connection with any due diligence investigation Client may undertake (the “Services”).

Client hereby engages and agrees to cause Finder to be compensated if Finder’s introduction to Target during the Term results in Client purchasing 25% or more of the capital stock of Target, or all or substantially all of the assets of such candidate, within 24 months of the date Finder introduced such qualified investment candidate to Client (a “Transaction”).

In consideration of Finder’s provision of the Services, if a Transaction is consummated, a finder’s fee (the “Fee”) shall be paid, or caused to be paid, by Client to Finder on the day of the closing of the Transaction, such Fee to be based on the Purchase Price (as defined below) paid by Client in connection with the Transaction. Such fee shall be computed as follows:

5% of the first $1,000,000 of the Purchase Price, plus

4% of the next $1,000,000 of the Purchase Price, plus

3% of the next $1,000,000 of the Purchase Price, plus

2% of the next $1,000,000 of the Purchase Price, plus

1% of the balance of the Purchase Price.

The “Purchase Price” is defined as the aggregate consideration (whether in the form of cash, assumed debt or other non-contingent or non-deferred contribution of value) paid by Client to acquire its equity, debt or other interest in Target. In the event that any portion of the consideration paid by Client to acquire its equity, debt or other interest in Target is contingent or deferred, such consideration will be included in the Purchase Price.

For purposes of this Agreement, the term “qualified investment” shall mean an investment (i) in which Client or its affiliates obtains control of a corporation, limited liability company, partnership or other entity over which it did not have previously have control; and (ii) with respect to which Client has made no contacts with any parties related to such investment, has taken no steps to consider or pursue, has not learned of through any source other than Finder, and about which Client has no information. For purposes hereof, “control” of an entity shall mean the ownership of more than 25% of the equity securities of such entity, or the power to direct or cause the direction of the management and policies of such entity. In the event that Finder discloses to Client the name and address of Target that Client determines is not a qualified investment candidate, or if Client is already aware of Target, Client shall so notify Finder within five (5) business days of such introduction.

During the Term, the relation between Finder and Client is that of unaffiliated third parties. Finder and its officers, directors, employees and agents shall, under no circumstances, be deemed agents, employees, partners or representatives of Client.

Each party shall bear its own costs and expenses incurred in connection with the undertakings contemplated by this Agreement.

This Agreement shall be construed under the laws in the State of [insert state here].

This Agreement may be signed in counterparts, each of which shall be an original, but all of which together shall constitute one agreement.

IN WITNESS WHEREOF, the undersigned have executed this agreement on the day and year first above written.

Client:                                                                    Finder:

What is a Finder’s Fee: In Short

In summary, a finder’s fee is a way to reward an intermediary for linking together two parties who otherwise likely would not have met. It incentivizes the “finder” to forge rewarding connections, as the finder is not compensated until the deal closes. If you have any questions on how finder’s fees work in private equity, 1719 Partners is happy to answer them. Simply contact us here.

If you are considering selling your company, it is important to know an earnout is an option. An earnout can be the bridge between your asking price and what the buyer is willing to pay, allowing you both to accomplish your goals. Understanding how an earnout works allows you, as the seller, to consider all your options. 

This guide explains what an earnout is, when it is used, how it is structured, and common pitfalls. 

What Is an Earnout?

An earnout allows both buyer and seller to settle on a purchase price. In short, an earnout divides up the total purchase price into an immediate payment and a deferred payment. For example, if the seller believes his company to be worth $120 million and the buyer thinks its value is $90 million, an earnout can cover the difference. In this case, the buyer would pay $90 million upfront and structure an earnout for the remaining $30 million. 

An earnout is also contingent upon the performance of the newly purchased company. In other words, there are strings attached. This motivates the seller to increase company performance post acquisition, which reduces the risk on the buyer. Company performance is objectively measured by key metrics that both parties determine beforehand. For example, these metrics can look like meeting a certain revenue or EBITDA margin, or retaining key customers. 

Earnouts in M&A: When Are They Used?

There are many situations where using an earnout makes sense. For example, perhaps the seller has just acquired a big customer or launched a marketing campaign, and expects the business to exceed past performance. The seller believes the purchase price should reflect this advantage, while the buyer is skeptical. After all, from the buyer’s perspective, his or her concerns are valid: what if the big customer falls through, or the marketing initiative fails? 

With an earnout, the seller receives down-the-road payments when the business does, in fact, meet expected performance goals. If the business does not, then the buyer does not have to make the corresponding payment to the seller. Below are some specific situations where an earnout makes sense. 

Bridge a Valuation Gap

If the buyer and seller want to work together but do not see eye to eye on the purchase price, an earnout allows them to move past this hurdle. Another common way to bridge a valuation gap is using a seller note. However, a seller note is not contingent on company performance. While a seller note is nice because it gives the seller guaranteed later payouts, it does not allow the payments to increase based on company performance. Effectively, the payment cap is lower. This may be undesirable if the seller believes his or her company will perform highly in the near future. 

Improve Ownership Transition

Passing the baton is not without risk. To reduce risk of company harm during the ownership transition, the buyer may want to include an earnout. This works because a later earnout payment motivates the seller to set up the company for continued success. In other words, the seller is financially motivated to see the company continue to perform, rather than simply wanting to “get paid and get out.” When the buyer and seller’s interests are aligned in this way, the company has more support to succeed. 

Sell to the Right Buyer

Sellers often want to hand the business off to someone who will continue the business legacy. If the seller finds a buyer with a shared vision for the company, but the parties do not agree on purchase price, this can be disappointing. An earnout allows the seller to “have their cake and eat it too”— not having to sacrifice either purchase price or the ideal buyer. 

If you are struggling to find a buyer who sees eye to eye on your business legacy and also has the capital to help you reach your goals, check out 1719 Partners. Our legacy is supporting your legacy. 

Sell at the Right Time

There are many reasons why it may be the right time for the owner to sell. Maybe he or she is facing health obstacles or burnout, or it is time for retirement. Without an earnout, the seller would have to decide between selling immediately, and receiving a lower purchase price, or waiting a few years until the purchase price can reflect company growth. In fast-growing or newer companies, this issue is extra relevant. An earnout allows the seller to sell at the right time without sacrificing on future business gains. 

Earnout Structures

There are many ways to structure an earnout. Earnouts should have a defined term, typically lasting one to three years. In addition to the term, performance metrics are also clearly defined. This reduces confusion between the buyer and seller. For example, the chosen metrics may be related to revenue, EBITDA, or customer retention. 

Earnouts are also structured through percentages. For example, an earnout might be a percentage of revenue, revenue associated with key customers, or profits or EBITDA. 

Earnout Calculation Examples

Exact earnout payouts are calculated based on the terms. In addition to the percentages mentioned above, earnouts have more detailed terms as well. These specific details limit the earnout’s maximum payments. For example, an earnout might have a lifetime cap of $1 million. This means throughout the earnout’s entire term the payments cannot exceed $1 million. Another structure might be 10% of revenue annually if the agreed-upon metrics are met that year, as well as a yearly maximum payout of $500,000, and a lifetime maximum of $1.5 million. This earnout may also end in four years. In addition, if metrics are not met one year, that year’s payment could be $0. 

Common Pitfalls

As with any legal agreement, there are potential problems. In general, pitfalls are caused by nonspecific terms. Vague terms can look like an open-ended time horizon, no annual or lifetime payment caps, and more. 

Typically, earnouts include a dispute resolution section. This provides instructions for handling disagreements, such as deferring to a third-party accountant or auditor.

Considering an Earnout? 

Are you wondering if an earnout makes sense for you and your company? 1719 Partners has helped structure many successful transactions. We have seen earnouts play a crucial role in meeting both the buyer and seller’s goals. We understand that selling a business is a very personal process and situations can vary widely. 

If you are considering a sale or have general questions about earnouts, don’t hesitate to reach out. 

Entering into a letter of intent to buy a business is typically the first formal step in the process of buying or selling a company. Understanding a letter of intent, how it works, and what it includes is especially important if you are a first-time buyer or seller. This post will discuss several aspects of a letter of intent to buy a business, including why an LOI is helpful, key components of a letter of intent, and a few common pitfalls. 

What Is a Letter of Intent?

A letter of intent to buy a business (“LOI”) is a legal document that buyers and sellers commonly voluntarily execute when they reach an agreement to purchase/sell a company.  An executed letter of intent to purchase a business does not mean the transaction has “closed” but rather that the transaction process is “starting” and heading toward a closing.   

In other words, the LOI serves as the bridge between a handshake-level interest and a definitive purchase agreement. For many first-time sellers, this is the moment when casual conversations turn into a formal process.  

Why Is a Letter of Intent to Buy a Business Helpful?

A well-crafted LOI is a roadmap for all participants to get from “let’s do this” to a closing.  The due diligence process and legal documentation can be stressful, especially for participants who are unfamiliar with them.  The letter of intent helps outline the diligence process, key legal terms, transaction details, and other important components to ensure that all parties are on the same page and to minimize surprises.   

A letter of intent to purchase a business does not need to be a 15-page mini purchase agreement, but at the same time, the LOI is unlikely clearly define the transaction if it is only a page or two and is silent on important topics.  An appropriately drafted letter of intent is typically around four or five pages. 

Think of it as a roadmap: the clearer and more specific it is, the easier the journey will be for both buyer and seller. 

What Are the Key Components of a Letter of Intent to Buy a Business?

Confidentiality

Business owners are often very concerned about confidentiality and the reaction of customers and employees. LOIs usually reference that the terms of the transaction and the discussions themselves are confidential. There is also usually a several–year tail on the confidentiality period.

Exclusivity

Buyers will have to expend significant resources on conducting due diligence, preparing legal documents, and so on. As such, buyers commonly require exclusivity to invest this time, effort, and money in a transaction.   Exclusivity typically means that the seller, once they have signed a letter of intent to sell their business, will not entertain offers or speak to other potential suitors while the existing letter of intent is in place.  Exclusivity typically lasts between 90 and 120 days. 

Timeline

The LOI typically includes a schedule outlining the timeline between the execution of the LOI and closing, as well as a timetable for achieving major milestones or hurdles, such as securing debt financing. 

Transaction Terms

The LOI contains all key transaction details and financial terms, including but not limited to: 

• Valuation and Structure
  • Cash
  • Seller note
  • Earnout
  • Rollover Equity
• Asset vs. Stock Purchase
• Real Estate
• Key Employee Agreements
• Non-Compete Terms
• Escrow
• Any Excluded Assets
• Etc.

The letter of intent might also address other topics, such as representations and warranties, indemnification limits, and the indemnification period. While these topics will be negotiated and finalized in the actual asset purchase agreement or stock purchase agreement, it is helpful to have some consensus on major deal points in the letter of intent. This is so that the legal documentation process goes more smoothly. 

Binding Vs. Non-Binding Letters of Intent to Purchase a Business

Most LOIs to purchase a business have some provisions that are binding and others that are not. For example, exclusivity and confidentiality are typically binding, meaning that both parties are obligated to fulfill these commitments. Other provisions – such as the target closing date – are usually non-binding. 

Fees and Expenses

Most LOIs include a discussion of which parties are responsible for paying transaction fees and expenses. This is particularly relevant in cases where a transaction fails to close for any reason. It is most common for buyers and sellers to each pay their own expenses; however, there are situations where certain parties may agree to cover specific aspects of the deal costs. For example, perhaps the buyer will pay the investment banking fees earned at closing. 

Who Signs a Letter of Intent to Purchase a Business?

Both the buyer and the seller, as legal entities, execute the letter of intent to purchase a business. In many cases, especially with smaller private companies, the shareholders of the selling business may also sign as individuals. This is because they may agree to specific key provisions – such as a non-compete agreement – on an individual, personal basis. 

What Are Common Pitfalls in a Letter of Intent?

Open-Ended Exclusivity

A LOI must have a termination date that expires at whichever comes earlier: (a) the transaction closing, or (b) a specified date.  Failure to include a termination provision can result in a seller being locked in indefinitely. 

Vague Key Terms

Key transaction details, such as valuation, the amortization schedule on a seller’s note, or how the earnout is defined and calculated, need to be clearly described and defined in the letter of intent.  A letter of intent to buy a business that includes a provision stating “final purchase price will be determined at closing” is problematic. 

Summary

A letter of intent to buy a business is a detailed roadmap that ensures all parties are on the same page as they head toward successful due diligence, legal documentation, and closing. It creates structure and trust, while minimizing surprises that could derail a transaction. 

At 1719 Partners, we’ve helped business owners navigate this process many times. Whether you are preparing to sell your company or evaluating a potential acquisition, the right LOI sets the tone for the deal. 

Thinking About Buying or Selling a Business?

A well-written letter of intent protects your interests and drives your transaction toward a successful close. At 1719 Partners, we have ample experience structuring letters of intent— if you have questions or would like advice on yours, feel free to contact us.

Selling your business is one of the most important financial decisions you’ll make. While many owners turn to business brokers for support, before hiring a broker, it is important to understand how brokers work, and how much brokers charge to sell a business. (For a broader look at whether using a broker is right for you, check out our guide to selling a small business.) 

 

What is a Business Broker? 

A business broker is a professional intermediary who assists business owners in selling their businesses. They evaluate your business, provide guidance on a selling price, confidentially market the business, and vet prospective buyers. Typically, a business broker helps small and lower-middle market business owners, particularly those with limited time or transactional experience. 

The goal of a business broker is to get a deal done, often by packaging the business attractively and creating a competitive bidding process. Not all brokers are created equal, and their value must be weighed against the cost. 

 

How is a Business Broker different from an Investment Banker? 

Business brokers and investment bankers both provide advisory and consulting services helping business owners navigate the sale process. While largely semantics, most people would say that investment bankers tend to focus on larger enterprise transactions (i.e. enterprise value in excess of $50 million) while business brokers tend to focus on smaller transactions. 

 

How Much Do Brokers Charge to Sell a Business? 

So, how much do brokers charge to sell a business? Business brokers (and investment bankers) typically enter into a formal contract, or engagement letter, with their clients that details a number of factors including compensation. These engagements and compensation structures can vary significantly depending on the scope of the project. For a very limited scope of work, for example preparing an offering memorandum or a valuation, the engagement might be a flat fee. If the service provider is an accountant or an attorney, they might prefer to charge by the hour. Most brokers prefer a success fee arrangement.

 

Business Broker Fees 

Business broker fees can vary significantly depending on the size, type, and complexity of the business sale. Typically, brokers charge a commission, or “success fee,” usually structured as a percentage of the final sale price. 

• Success Fee: Most brokers charge a success fee between 5% and 15% of the final sale price for small businesses. For larger transactions, brokers often use the Double Lehman Formula or Modern Lehman Scale, which tiers fees by price range.  The table below shows a standard (not double) Lehman success fee calculation. 

      Lehman Commission Structure: example showing $12,500,000 sale price

• Retainer or Upfront Fee: Some brokers charge an initial fee ($5,000 to $50,000+) to start the engagement. This covers preparation, marketing, and administrative costs. 
• Minimum Fee: Even for smaller deals, brokers might require a minimum fee, usually between $25,000 and $50,000, regardless of the sale price.

 

Who Pays the Business Broker Fee? 

The seller almost always pays the business broker’s fee, which is usually deducted directly from the sale proceeds at closing. From the buyer’s perspective, there’s no fee, but buyers know that brokered deals might involve more competitive tension and potentially higher prices because of the structured process. Also, it’s a little like “free shipping”.  There is no such thing as free shipping – its cost is just baked into the price. 

 

Can You Negotiate Business Broker Fees? 

Yes. Broker fees can often be negotiated, especially the upfront retainer. If your business is highly marketable, you can negotiate a lower percentage or a more favorable tiered structure. Just remember: in many cases, you get what you pay for. A good broker should earn their fee through a higher purchase price or a smoother process. 

 

Alternatives to Using a Business Broker: How Else Can You Find the Right Buyer?

Not all businesses need a broker to find the right buyer. If you have a strong network, a desirable business model, or interest from strategic acquirers, you can sell your business without hiring a broker. If you want to sell your business on your own, here are a few tips to help you gain exposure: 

• Leverage your personal and industry connections. 

• Quietly test interest with suppliers, customers, or even competitors. 

• List the business confidentially on curated M&A platforms. 

• Reach out directly to investment firms or buyer groups aligned with your industry. 

 

What to Do if a Buyer Reaches Out to You?  Should You Hire a Broker at This Point?  

Hiring a sell-side advisor in response to an unsolicited offer could facilitate a smooth exit, or it could just muddy the waters, with the pain of paying additional fees. If you like the buyer and if you have a good grasp on your company value, hiring a broker at this point in the process is probably not beneficial.  If you have no experience in mergers and acquisitions, and are not comfortable managing the sale process without outside guidance, hiring a professional to help could be beneficial.

For more on the pros and cons of hiring a business broker, check out this blog. 

 

The Buyer You Didn’t Know Existed: The Private Investor Who Has Your Best Interests at Heart 

Private equity buyers like 1719 Partners often fly under the radar but offer an attractive alternative to traditional brokers or strategic buyers. We partner with owners of specialized manufacturing, value-added distribution, and industrial services businesses. What makes us different? 

• We have the capital and experience of private equity, without the sharp elbows. 

• We prioritize legacy, employees, and long-term success, not quick flips. 

• We can work directly with owners, streamlining the deal process and eliminating the need for a broker. 

 

Let’s Talk  

Interested in seeing if we’re the right fit for you and your business? Want to explore how 1719 Partners can help you accomplish your personal and business goals? We’d be happy to have a conversation. Send us a message.