Finder’s Agreement (Drafting)
Companies make finder agreements in a different kinds of businesses. Finder’s agreement may be made in relation to financing, strategic partners, acquirers, customers, or some other opportunity. The company hires a finder to identify potential opportunities for a fee. The arrangement between a company and a finder should be clearly documented with a Finder’s agreement.
FEATURES OF FINDER’S AGREEMENT:
1. COMPENSATION: The amount and type of compensation depends on the value of the finder’s contacts, the difficulty in closing the transaction, the expected value of the transaction, and the uniqueness of the finder’s services. From the company’s perspective, the ultimate goal is to give away as little as possible while still incentivizing the finder to do a thorough job and deliver on the opportunity.
2. EXPENSES: The parties should decide whether or not the finder is entitled to reimbursement for his or her out-of-pocket expenses. If reimbursement is available, the parties may want to require preapproval of expenses or set a cap on the amount of reimbursement.
3. IDENTIFICATION OF PROSPECTS AND CARVE-OUTS: The parties should determine a method to identify prospects that will be covered by the finder agreement. The company may want to limit the types of prospects the finder may identify, for example, prospects in a specific geographic region. The company may also seek the right to exclude certain prospects with whom it has a relationship already.
4. TAILS AND TERMINATION: The parties should agree on how long the payment obligations last after the termination of the finder agreement. The parties should also agree on the conditions under which the finder’s agreement can be terminated.
5. TAX CONSEQUENCES: Both the finder and the company should discuss any proposed arrangement with their tax advisors. There may be situations where a certain structure is more advantageous than another, in such situation tax liability should be fixed upon.
6. SECURITIES RULES: If the company is using a finder to identify potential investors, the company should be careful of using a finder who is not a registered broker-dealer. If the company pays anything that could be construed as a commission to an unregistered broker-dealer in connection with the sale of its securities, it might attract some legal complications.