This document is designed for Searchers who have recently completed their fundraising or are near its conclusion (with at least 80% of capital committed at a steady pace).
Establishing a Search Fund in Mexico requires careful planning and a significant investment of time. Working effectively with trusted partners in these bureaucratic and time-consuming processes is a necessary step of the Search Fund journey.
Access to comprehensive, well-organized resources is invaluable, offering crucial guidance to help you overcome obstacles more efficiently, ultimately saving time and resources for everyone involved in the Search Fund ecosystem.
This document provides a step-by-step framework covering the legal and operational procedures to establish a Search Fund in Mexico — from investor onboarding and entity formation to the investment phase and SPV setup.
We would like to thank Eduardo Triulzi from Ritch Mueller for his generous collaboration throughout the preparation of this guide. Their practical input was especially helpful inrefining the content and document templates.
To set up a Search Fund in Mexico, Searchers with foreign investors will most likely be required by their investors to create a foreign entity incorporated in Delaware, which will aggregate international investments. If investors are Mexican nationals, it will be more convenient to incorporate a Mexican vehicle.
Additionally, total costs for incorporating the LLC or a Mexican vehicle should typically be below US$13,000.
This white paper aggregates the workflow in 4 main steps:
A. Formation of the LLC – Delaware investment vehicle
B. Review and validation of documents with investors
C. Setting up local accounts and service providers
D. Investment Phase – SPV Formation
Forming a Limited Liability Company (“LLC”) in Delaware is a popular choice for many businesses due to the comfort of the US-based investors, state’s favorable business laws, tax benefits, and flexible structure. For Mexican Searchers with an international cap table, establishing an offshore vehicle in Delaware allows for i) raising funds from foreign investors and ii) transferring those resources to Mexico.
The transfer of funds raised offshore to Mexico is typically carried out through direct transfers from the US bank account to the local bank accounts. However, there may be alternative legal structures that may be more convenient and liability-free for the investor, such as loans or service agreements, among others. We recommend that Searchers discuss these options with their lawyer. Loan or service-based structures may be safer for the foreign investors, regarding liabilities, but they may have unfavorable tax implications and incur additional costs.
Below is a step-by-step to establishing the LLC, along with specific details:
Figure 1 – Timeline overview of the LLC formation (number of workdays)
A1) Choosing your foreign law firm
Selecting your foreign law firm is a critical step, much like choosing your local law firm (step B1). Both decisions should be made simultaneously, as they are crucial to the success of your process. It’s important to complete this step as quickly as possible to avoid delays. It is also important to note that these firms will help the searcher providing guidance throughout this process.
A few recommendations are:
A2) Hiring a service provider (agent)
A service provider or registered agent is an individual or business entity designated to receive official documents on behalf of a company. The registered agent must have a physical address in the state where the business is registered and must be available during normal business hours.
Important note: many current Searchers overlook this critical step. Without a registered agent, Searchers may miss important communications, such as invoices for payment in Delaware. Failing to pay bills on time due to missed notifications can result in unnecessary fees for the Search Fund. It’s essential to ensure that a registered agent is appointed to avoid these issues. The law firm would typically recommend a service provider or registered agent.
Suggestions of registered agents:
CSC Global
Phone: +1 302 421 6100
https://www.cscglobal.com/
The Delaware Divisions of Corporations provides a list of registered agents at: https://corp.delaware.gov/agents/
A3) Certificate of Formation
The Certificate of Formation is a crucial document required to legally establish an LLC in Delaware. It serves as the official record of the LLC’s creation and includes essential details about the business, such as the company’s name, registered agent, and the purpose of the LLC. This document must be filed with the Delaware Division of Corporations to officially form the LLC and ensure it is recognized under state law.
A4) Choose your foreign accountant
The main recommendation from Mexican Searchers is Mowery & Schoenfeld. The accountant firm will help mostly with the annual tax returns and the When and How to send the K1 documents to investors.
A5) Getting the Tax ID number (EIN)
An Employer Identification Number (EIN) is a unique nine-digit number used to identify a business for tax purposes in the United States. Lawyers will provide you with information and assistance on the website to fill the EIN request.
It’s important to note that some Mexican Searchers have encountered difficulties with this step, so proper preparation is crucial. For non-U.S. residents, obtaining a Tax ID number involves calling the IRS at the designated phone number during business hours. Although the process to obtain an EIN typically takes just one day, it is subject to the availability of the IRS.
A Social Security Number (SSN) is required to obtain the EIN. If you do not have an SSN or encounter issues, your accountant can provide support and guidance through this process.
A6) Open a foreign bank account
Lastly, an American bank account should be opened. Some recommendations from Searchers.
Mercury has a simple onboarding process and allows you to schedule recurrent payments to different accounts, locations and currency (e.g. salary payments). They also allow you to have an investment and an expenses account, that easily classifies expenses and saves time for tax filings
It is worth mentioning that if you have to pay firms in Mexico and they have an office in the US (e.g. global accounting, consulting, or law firms), paying them directly in the US with your US bank account can save you on IVA fees.
This step can potentially become a bottleneck in creating a Search Fund, as it heavily relies on the responsiveness of investors. To minimize delays and ensure a smooth process, it’s important for the Searcher to prepare all documents thoroughly and anticipate any concerns or questions that may arise.
A crucial factor for increasing speed in this step is to designate lead investors (at least one local and one foreign) to work closely with the Searcher, validating and reviewing the documents before other investors. These lead investors should be respected in the community, recognized for their diligence and attention to detail. With this initial validation in place, the approval process by other investors is likely to proceed more quickly and smoothly.
Some complexity may arise with local investors, due to specific fund’s guidelines that will require adjustments to the documents. Therefore, it is recommended that the Searcher prioritizes local investors first, expediting the entire process.
Here is a step-by-step process for the validation of documents with investors:
Figure 2 – Timeline overview of the alignment with investors (number of workdays)
B1) Confirmation and commitment of units
In this step, the Searcher should get formal confirmation from investors about the investment details and the # of units acquired. An email should suffice.
B2) Document draft received from lawyers: LLC Agreement, Subscription Agreement, and Accredited Investor Questionnaire
Once a law firm is chosen, they should send the three main documents for the formation of the LLC. The documents are mostly standardized, so ideally, they should send the files as quickly as possible. Each one of the following documents has its importance:
a) LLC Agreement: The LLC Agreement is the foundational document that outlines the governance, operations, and management structure of the Limited Liability Company. A template from Stanford is available here.
b) Subscription Agreement: This document serves as a contract between the LLC and the investors, outlining the terms under which the investors will purchase membership interests in the LLC. It includes details such as the amount of investment, payment terms, and any conditions associated with the investment. A template from Stanford is available here.
c) Accredited Investor Questionnaire: each investor is required to complete an Accredited Investor Questionnaire, certifying that the investor meets one or more criteria that allows him or her to be considered an accredited investor. A template from Stanford is available here.
In addition to the provided templates, lawyers will have their own templates as well. They will also advise on non-negotiables and what to spend more time on, when drafting the agreements.
B3) Sending and reviewing documents
In these steps, the Searcher is required to validate the documents with investors – starting with the lead investors. The documents are standardized, so not adding unnecessary variability is welcomed to facilitate discussions.
Once all investors are comfortable with the terms and onboard, they should sign the documents and transfer the funds. It is important that the Searcher is well informed and prepared accordingly to coordinate with investors the transfer process, as the funds may take longer than expected to be transferred.
C1) Choosing your local law firm
This is the critical path of the process. Choosing a local law firm is a highly important and personal decision. Seek recommendations from trusted sources. Research potential attorneys’ backgrounds and track record. The law firm most Searchers recommend is Ritch Mueller, which have extensive expertise in such practice. Firms with expertise in Search Funds include:
C2) Choose your local accountant for personal taxes
Research potential accountants’ backgrounds, including their experience, reputation, and track record.
C3) Choose your local accountant financial due diligence
The same guideline used to find your law firm is recommended: Seek recommendations from trusted sources. Research potential accountants’ backgrounds, including their experience, reputation, and track record in the relevant practice. Some firms with financial due diligence expertise in Search Funds include:
C4) Choose your local tax counsel
As well as with your legal counsel, tax counsel is critical. Choosing a local tax counsel is a highly important and personal decision. Seek recommendations from trusted sources. Research potential tax counsel’s backgrounds and track record. Tax counsel will carry out tax due diligence, analyze and determine the acquisition structure and analyze and determine the fund structure. Tax counsel also plays a key role in discussions with foreign investors, helping them identify a tax-efficient structure for participating in the fund. Some firms with tax expertise in Search Funds include:
C5) Opening a local bank account
Research and choose a bank that offers services tailored to the needs of your business. Consider factors such as fees, customer service, online banking options, and additional services. Opening a bank account in Mexico may take approximately 3 weeks and burdensome paperwork. Some recommendations from previous Searchers are:
The Searcher often represents a significant banking relationship for financial institutions, making it advantageous to negotiate favorable terms. Some Searchers have successfully secured premium deals by leveraging their position and negotiating with banks.
C6) Other set ups
Another important step is to set up the fund’s google address and profile, website and email account. Searchers can either hire specialized professionals or subscribe to online services providers for this. The most common is Wix.com, but there are plenty of options in the market. If necessary, the Searcher can also talk to the local lawyers about registering the fund’s name and the brand.
D1) NDA & Term Sheet
The first step during the investment phase is to ask your lawyer for drafts of a NonDisclosure Agreement and a Term Sheet to be used by the Searcher with each potential target it analyses and make certain progress to submit a Term Sheet. As an example, Ritch Mueller provided this template for NDA and this template for the Term Sheet.
D2) Due Diligence
QoE due diligence will generally begin after the Term Seet has been signed. Searcher will most likely continue to review certain pending items of the QoE and an accounting, tax and legal due diligence will be conducted. The goal is to thoroughly understand the target company and identify any potential deal-breakers or areas that require negotiation or mitigation.
D3) Deal Structuring and Negotiation, SPV and Fund Formation
Once due diligence supports moving forward, the Searcher enters into negotiations with the target company’s owners. Even though the acquisition will most likely be structured as a share purchase, your lawyer and tax counsel will determine the best structure to carry out the acquisition (share or asset deal). Your lawyer will prepare and negotiate, together with Searcher, the acquisition agreement with the target company’s owners and their counsel.
During this phase, the Searcher will issue a capital call to the investors requesting the funds for the acquisition.
Also, during this phase the acquisition and fund structure will be analyzed and determined together with your legal and tax counsel. A common acquisition structure is to establish a SPV as the holding vehicle for the acquired business. Also, it will be necessary to set up the fund structure with the investors. For purposes of setting up the fund structure, tax counsel plays a fundamental role in which it is important to analyze the characteristics of the investors, mainly, the tax residence of the same. In Mexico, the investment vehicles that give tax transparency to investors are a Mexican Trust (Fideicomiso) or a Mexican LP (Asociación en Participación).
Many of the times, a Mexican corporation is incorporated to act as the holding company to carry out the acquisition of the target entity or the assets of the target, if the transaction were to be structure as an asset deal. Incorporating a Mexican company will take approximately 3 weeks and you will need the assistance of your lawyer and of a Notary Public.
In some cases, however, a foreign vehicle may be used instead, particularly when the business has specific characteristics or when the cap table is composed primarily of foreign investors.
The Mexican trust is an agreement governed by Mexican Law without legal personality. The Mexican trust will have the investors as settlors and beneficiaries and will need of a trustee entity (typically a bank) to pursue any lawful purposes determine in the agreement. To set up a Mexican trust it is necessary to carry out a KYC process with the trustee. This can be a challenge as this process may consume too much time during the investment phase, both for the Searcher and for investors, especially if there are multiple investors in the cap table. With the trust, local investors are required to pay a X% income tax on capital gains and foreign investors who are not based in tax havens are exempt from paying tax on capital gains.
The Asociación en Participación is an agreement governed by Mexican Law and that do not require the participation of a trustee as in the fideicomiso. The Asociación en Participación has no legal capacity and will be managed by a GP which is an entity incorporated by the Searcher to act exclusively as GP of the Asociación en Participación. In the Asociación en Participación there is no need for a KYC process, keeping the investment phase more simple. To maintain tax transparency in Mexico, the Asociación en Participación should abstain from directly conducting business activities.
Due to its costly structure, the Fideicomiso or Asociación en Participación is created only after deal negotiations are well advanced – therefore, this structure is not needed to launch a Search Fund but to acquire a company. While alternative structures for the fund structure may be set up, the only two vehicles in Mexico that give tax transparency to the investors are the Fideicomiso and the Asociación en Participación. The Searcher should discuss these alternatives with their law firm to select the best structure.
