When we apply for a passport or driver’s license, before we begin the application process, we receive the warning “Be sure you gather the following information before you begin.”
Why? Having those records and other information on hand is required to complete the process, and getting organized at the outset saves time and headaches for everyone.
If you are selling a business, the same principle holds true. Understanding the documents that you will need to maintain and organize before you even begin will save you time and money.
Well before engaging in serious talks with any prospective buyer, business owners should ensure that they have attended to relevant records, agreements, and other internal “housekeeping” matters that will be important to any buyer.
In Part 1 of a two-part series directed towards business owners who may someday wish to sell their business, here is an overview of the business records that are virtually certain to come into play as part of any sale transaction and that should be reviewed prior to marketing a business for sale.
1. Financial Statements and Tax Returns
Every buyer will, at a minimum, ask to see financial statements for the business.
Typically, buyers also request to see the business’s income tax returns as well as other applicable tax returns (such as employer tax returns for state and federal employment and payroll taxes).
Before marketing their businesses for sale, we encourage clients to review their financial statements and tax returns with their accountants to ensure that all required returns have been filed/paid, and also to identify any extraordinary or unusual income or expenditures which would paint an unrealistic picture of the business or which sellers will want to get ahead of when presenting to a prospective buyer.
For example, if an owner decided to spend $100,000 on equipment upgrades in 2025, which upgrades were expected to last for 5-10 years, that may be an item to flag and “back out” when making valuation assumptions and financial projections. It is a one-time expense and not something that would recur in the short term once the business is sold to a buyer. On the other hand, if revenue declined abruptly for two quarters because the owner suffered a health issue, which has since been remedied, the seller would want to note that at the outset rather than leave a buyer guessing as to the cause of the business decline.
Buyers will typically use seller-provided financial statements to value the business (including evaluating any asking price from the seller), so having a firm grasp of any adjustments to the financial statements will go a long way in maximizing value for the selling owners.
2. Organizational Documents and Records
In addition to financial records, buyers will almost always ask to see the organizational documents of the target business.
These types of documents can include articles of incorporation, bylaws, and shareholder agreements (in the case of a corporation) and applicable operating or partnership agreements (in the case of LLCs and partnerships). These documents will inform how the business is governed and what rights the owners have.
Where there is more than one owner of the business, these agreements should clearly spell out how decisions are made and which persons have authority to act on behalf of the business for certain matters, including selling the assets of the business. These agreements should also be reviewed with an attorney for any terms governing the mechanics of any sale or transfer. For example, these agreements frequently contain restrictions on selling equity to a third party or, alternatively, require that such equity first be offered to the other internal stakeholders or the company itself for redemption. Sellers should review these agreements well in advance of providing them to a prospective buyer to ensure that they have clear authority to sell the equity and/or assets, or – if approvals or additional steps are required – that they have a game plan for receiving any required internal approvals or consents.
Ownership is important for a number of reasons. First and foremost, a buyer will want to make sure that the person they are dealing with is the sole owner or, if he or she is NOT the sole owner, that such person has exclusive authority to negotiate on behalf of all of the owners. Sellers will also want to ensure that there are clear records as to how each current owner acquired his or her ownership interest. In the case of a multi-generational business, transfer records may not be clear, or some formalities such as issuing stock certificates may not have been followed. Sellers will want to “clean up” these records well in advance of a prospective buyer asking for the same.
3. Key Employment Contracts
Putting aside the issue of ensuring that employees stick around after the sale is consummated, prospective buyers will want to know what obligations the business has to its employees and what rights the business has acquired from those employees.
Areas for review and consideration by the seller in advance of pursuing a sale include:
- Will the consummation of the purchase and sale trigger any bonus or vesting rights for employees (and if so, who will be responsible for paying)?
- Do key employees have written employment agreements specifying all of their salary, benefits, etc.?
- Does the company have an employee handbook specifying company policies (e.g., leave policies and harassment/discipline policies)?
- Does the business have written agreements in place with all employees and contractors/consultants providing for an assignment of all intellectual property rights they may have conceived or created during employment or engagement by the business?
- Does the business have appropriate restrictive covenants in place with each employee and each contractor protecting the client base, workforce, and trade secrets from potential competition? Are those agreements fully enforceable?
Sellers who need to adopt and implement appropriate agreements or handbooks will want to do so long before employees may catch wind of a potential transaction, both to avoid a buyer walking away from the deal and to avoid employees negotiating for compensation or other benefits from the sale as a condition to executing.
4. Real Estate (whether leased or owned)
Whenever a business operates from a physical location – whether an office building, restaurant premises, warehouse, or otherwise – sellers will want to ensure that they can actually transfer their rights in that property to a potential buyer.
Sellers should review all applicable leases and license contracts in advance of a sale to confirm the remaining term, any extension options, and whether such rights are, in fact, transferable to a buyer. Sellers are sometimes shocked to learn (sometimes well into negotiations with a buyer) that their lease is not assignable without the landlord’s entirely discretionary consent, or that an extension option cannot be exercised by any assignee or sublessee of the lease (i.e., a buyer) after a transfer.
In addition, landlords who retain discretion as to whether to approve any assignment of a lease will often condition the assignment on a showing of financial security by the potential buyer and/or obtaining new personal guaranties from the seller parties (including individual owners), the buyer (including individual principals/owners), or both. Buyers should take a proactive approach to real property issues early in the sale process to raise and address any issues with a prospective buyer and/or the applicable landlord to ensure sufficient time for obtaining any relevant approvals and/or permit negotiations as to any issues where appropriate.
Concluding Thoughts
Much like frequently maintaining your home can prevent huge deferred maintenance headaches down the road, regularly maintaining and updating your corporate records and understanding what they mean and how they work can prevent a lot of unnecessary stress and surprise if you ever decide to sell your business. If you are even thinking of selling, it is critical to meet with corporate counsel to get ahead of the issues that might arise in the sale and to ensure you have appropriate documentation in place.
In Part 2 of 2 (to follow next month), we will discuss registration and licensing issues to get ahead of in preparation for a sale.
How can we help you get your business ready for sale? Contact Tim Canney, chair of Bulman Dunie’s business and tax practice, at (301) 656-1177 x331 or tcanney@bulmandunie.com.
