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An essential step in selling your business is gathering comprehensive and organized documentation. Each company is unique, and the content of this article is generally more relevant to businesses with annual sales of $500,000 - $5,000,000.
Having the appropriate documents prepared and ready can increase your asking price's validity and help move the sales process forward more smoothly.
Additionally, these documents will be used at the beginning stages to help determine the value of your business, and a buyer may request them throughout the due diligence process. Here are a few key documents to gather as you prepare to sell your business:
Types of documents
Financial Documents
One of the most important steps to creating an exit plan for the sale of your business is to possess organized and detailed financial records. Not only do clear and concise financial documents back up your asking price, but these documents also give you a chance to identify shortcomings and areas of potential growth.
Additionally, financial documents are used when assessing the value of your business. Should you choose to work with a business broker, they will require specific documents to complete the assessment of value, including:
The last three years of tax returns
Current balance sheet
Previous three years P&Ls (Income Statements)
Year-to-date P&Ls (Income Statements)
Additional financial documents that you may need to provide during the due diligence period include:
Cash Flow Statements. These provide insights into the cash inflow and outflow over time.
Aging Reports. Details on outstanding invoices and debts.
Customer Credit History: If applicable, to showcase reliable customer payment behavior.
Sales Reports. Detailed historical data on sales trends
Fixed Asset Register. List of equipment, vehicles, or other physical assets, including depreciation schedules.
Inventory Valuation. A detailed list of inventory, including quantities, costs, and estimated market values.
Supporting Documents for Discretionary Adjustments. Breakdowns of personal expenses included in the financials, such as Owner's salary, Perks (e.g., car, travel), and Non-cash items (e.g., depreciation).
This, however, is a partial list of financial records you should consider prepping in the early stages of getting your business ready to sell. Other financial documents to collect include credit agreements and outstanding loans, to name a few.
Professionally audited and prepared financial statements can help prove your numbers' soundness and potentially increase your asking price. A CPA can provide the necessary guidance for this part of the process.
Legal Documents
Legal documents are typically reviewed during the due diligence phase of selling your business.
Potential buyers and their advisors will want to understand your business' legal obligations and responsibilities described in your legal documents. To prepare yourself for this process, be sure to have accurate records of the following:
Lease agreements. This can include building and equipment leases that a potential buyer would likely assume at the sale of your business.
Real Estate records. If you own your property, you will need to transfer your ownership at the sale of your business.
Business registration documents. You will need to provide information on how your business is registered and if you have any government licenses or permits that may need to be transferred to a buyer.
Intellectual property rights. This can include copyrights, patents, domain names, logos, trademarks, etc.
Partnership Agreements: If applicable, detailing ownership and operational structures.
Supplier and vendor contracts. The terms and conditions of agreements with suppliers and vendors, including pricing, delivery schedules, and payment terms.
Business Licenses and Permits: Proof of compliance with local, state, and federal regulations.
Business Operation Documents
Business documents are an integral part of detailing how your business operates. This is vital information to potential buyers as it helps them see the inner workings of your business. Here are a few key business records to include:
Business plan. This should include your company's objectives and goals and help potential buyers further understand the operations of your business.
Existing customer list. An organized list of existing customers is a significant asset to potential buyers as this allows them to use your list of customers instead of starting from scratch.
Sales Playbook. A detailed sales playbook should describe your sales process and marketing plan.
Operating Manuals: Documentation of standard operating procedures
Supplier information and contracts. A potential buyer will want to know about your current suppliers and where they can source the materials needed.
HR/employee documents
Employee contracts and company culture become part of the sale. Since a potential buyer will likely want to retain some or all of your employees, they must understand the employment environment. Here are a few key documents to have prepared:
Employee information. Include a list of current employees, their hire date, and their salary.
Employment contracts. A potential buyer will want to know about any existing employee contracts that must be maintained.
An employee handbook. This will give a detailed look at the expectations of your current employees and your company culture.
Agreements with payroll companies. Be sure to include any agreements with your current payroll management service providers.
Employee benefit plans. A potential buyer will want to know your current benefits plan and what needs to be altered and upheld.
Next Steps
Comprehensive, organized record keeping is a critical part of selling your business. For help with this process, you can start by contacting us for a consultation.
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