Important Corporate Documents for a Successful Business Sale

The last thing most founders think about when they start up a company is selling it. If one of the possible exit strategies is to sell your company, you should be thinking about the documentation you’ll need for a successful business sale from the very beginning. It may be years down the road but the records often required in today’s M&A environment can be overwhelming and exceedingly detailed. If your record keeping has been shoddy, it can add significant time and expense to generate the corporate documents wanted by a potential buyer, and if that documentation is not in order, it can adversely affect the purchase price. You don’t want to complicate an already complex transaction – as well as add material costs and possibly reduce the purchase price – just because you didn’t have the necessary paperwork in order. So what kind of paperwork and information will a buyer ask you for in the “due diligence process”? Here’s a list of some of the more common and important items you should be prepared to disclose: Corporate Documents:

• Articles of incorporation, bylaws, minutes, subscription agreements, shareholder agreements and similar documents for a Limited Liability Company.

Tax Returns:

• Copies of properly filed federal and state income tax, employment tax, state and local sales/use tax, property tax and other returns. If you do business in other countries, compliance with foreign tax requirements.

Financial Information:

• Income statements, balance sheet (audited, if available), deferred revenue, working capital, bank account information, revenue recognition policies, accounting procedures, debt, loan information and balances.

Management Team:

• Biographies, employment contracts, salaries, management incentive plans and stock options. Keep in mind that background checks and Internet searches about executives may be conducted.
• Non-disclosures, non-compete and/or non-solicit agreements.

Operations:

• Computer systems and IT security.
• Maintenance of equipment, vehicles, facilities.
• Strategic relationships, key vendors, suppliers.
• Contracts with vendors and independent contractors.
• Facilities, including parking.
• Anticipated space needs in the future.
• Salaries, overtime, bonuses, profit sharing.
• How your business handles employee evaluations, discipline and terminations.
• Whether any employees work remotely or from home.
• Instances of non-compliance with federal, state and local laws.
• Employee handbook and policies.
• Offer letters, contracts and non-compete agreements with employees.

Employee Benefits:

• Retirement plans, including equity incentive, vesting and employer match programs.
• Health insurance programs, including whether you have any former employees under COBRA.

Government Regulations:

• Licenses, permits, and required correspondence with government entities.
• Compliance with public filing requirements.

Sales and Marketing:

• Pricing of products and services.
• Per customer revenue.
• Customer lists and retention statistics.
• Competitors
• Commission structure for sales people.
• Lead generation and tracking of leads in the pipeline.
• Advertising and marketing programs and attendance at trade shows.

Products and Services:

• Inventory (cost, value and average levels).
• Obsolete or slow moving items.
• Pending products under development.

Legal Matters:

• Pending litigation, claims, major disputes, settlements.
• Ownership and protection of intellectual property.
• Instances of non-compliance with the Sarbanes-Oxley Act; the Patriot Act, Occupational Safety and Health Act; the Fair Labor Standards Act, the Consumer Product Safety Act and other applicable federal and state laws.

Real Estate:

• Title to owned real property.
• Mortgages and other liens.
• Environmental concerns.

Intellectual Property:

• Ownership
• Licenses
• Adverse claims.

Insurance:

• Policies including business liability insurance, life, auto, product liability, directors and officers, casualty, workers’ compensation, accident and injury reports.
• Claims histories.

Valuation:

• Professional valuation appraisals.

As you can see, the information that may be requested in a business sale can be quite detailed. Potential buyers and partners want full disclosure about operations so there are no surprises. Compile and update documentation incorporating this information so you are as prepared as possible. This checklist contains only some of the items you may be asked to produce. The exact information depends on the business, the potential buyer and the industry involved. If you have questions about how to prepare for a business sale, consult with your attorney and tax advisor.