Preparing Your Business For Sale (Part One)
Businesses are complicated and preparing yours for sale can seem intimidating. We've prepared a partial checklist to help get the process started. We hope you find it useful!
Please note that the following list is not comprehensive and should serve only as a guide. All businesses are different and will have different circumstances. You should consult with your attorney and accountant.
Business Formation Documents and Associated Records
These are all of the legal papers that relate to the formation of your company and how it's organized and governed. In an asset sale, unlike a stock sale, you will probably not need to show all of these documents to the prospective buyer. Collect the information that relates to the formation of the business and its associated governing documents.
Most small businesses are formed as LLCs (Limited Liability Companies) or Subchapter S Corporations. Sometimes other structures are used like C Corporations or LLPs (Limited Liability Partnerships), or even GPs (General Partnerships) or Sole Proprietorships. Most of these will have similar governing documents, though the name of the documents will vary.
- Articles of incorporation / formation
- Corporate by-laws
- Stock / ownership records and shares
- Board of Director meeting notes
- Shareholder meeting notes
- Most current periodic report showing company is in good standing
- Resolution signed by all owners authorizing the offering of the business for sale
Products and Services
Every business is different and offers different products and services in many ways to a variety of markets. Collect the information that relates specifically to your products and services. Here are some suggestions:
- List of each product or service with a brief description of each
- Gross margin (%) for each product or service line
- Geographic area served for each product or service
- Invoices / bills of sale / contracts showing individual sales for the past two to three years
Marketing, Advertising, and Sales
Marketing, advertising and sales can vary widely from business to business. Some businesses survive solely on word-of-mouth while others require extensive marketing campaigns and/or the efforts of salespeople. Provide a narrative of your sales, marketing, and advertising processes and goals.
- Marketing and advertising channels used (e.g. social media companies, radio, mail, email, etc.)
- Amount expended on each platform, including receipts for the past two to three years
- Inside sales people and their duties and methods of operation
- Outside sales reps and their duties and methods of operation
- Reputation of the company in general and on relevant platforms (social media sites, google, etc.)
- Agencies and Creatives employed along with contracts and receipts for services rendered
- Website address
Research and Development
Some companies will have active R&D projects while others have none. Collect any information you may have on ongoing or planned product development projects.
- List of ongoing R&D projects
- Project objectives
- Project budgets
- Project schedules
Personnel
People are the most important part of every business. Clearly show how your business is organized and how each employee fits into its operation. Also, make sure you describe how you attract and retain your employees.
- Organizational chart
- Document describing each job position in your business including
- Job description
- Salary for each person
- Salary range for each position
- Experience required
- Certifications required
- Employment benefits
- Identification of key employees
- Future plans of key employees (staying on, taking on additional responsibilities, retiring, etc.)
- Employment contracts
- Salary increase projections
- Availability of labor
- Company culture description and plan
Vendor Relationships
You will have to transfer all of your vendor relationships to the new owner. You will need to review all of your vendor relationships to ensure that these relationships can be transferred and the method of doing so. This is critical. Deals will fall apart if key vendor relationships can't be transferred.
- List of all contracts, distributorships, licensing agreements (including software), etc.
- Vendor name and contact information
- What product or service they provide
- Alternate sources for each
- Copies of all of these along with a summary of:
- Exclusivity agreements (territory, etc.)
- Pricing
- Discount programs
- Advertising requirements and restrictions
Customers
Customers pay the bills and a prospective buyer will be very interested in who they are, how loyal they are, how much of your business they represent, how long they've been with you, and whether what you provide them is considered a critical product or service. Include a short narrative describing your most important customers.
- Copies of all customer contracts
- Progress on each job if applicable
- Business backlog (business won but not finished - include signed contracts, invoices, etc.)
- Bidding activity, if applicable, and estimate of the probability of winning each contract
- List showing % of total revenue for top ten largest customers
- List of all customers for the past three to five years showing repeat business
- Contact information
- All customer invoices for the past two to three years to prove revenue
Competition
You know who your competitors are better than anyone. Providing insight to the buyer as to their market share, strengths and weaknesses will help the buyer feel comfortable going forward.
- List of all important competitors, their market share, location, service area / product lines, strengths and weaknesses, etc.
Strategic Alliances and Partnerships
List any mutual aid relationships you have with other companies such as pooled advertising agreements, cross-sales agreements, maintenance agreements, etc. Include all details, whether in writing or by verbal understandings.
Industry Outlook
Provide a short narrative of the outlook for your industry in your region.
Financial Statements
Your company's financial statements will be the primary focus of much of due diligence. Work with your accountant to compile accurate and error free financial statements for your business for at least the past three years, preferably five. Additionally, provide at least one year and the trailing twelve months of monthly financial statements. The buyer will need these to understand the seasonal nature of your business, working capital requirements, and the timing of cash flows which are critical during the transition phase of the business.
- Income statements
- Balance sheets
- Cash flow statements
- Add-backs and other adjustments (document each of these carefully)
- Quality of earnings report
- Projected income statement
- Summary of working capital accounts
Assets
Some businesses require a lot of equipment to operate while others require almost none. You will want to provide a list of the equipment your business uses, and describe what it's used for, how it's maintained, and when it will need to be replaced. Provide the buyer with an estimate of the amount of capital expenditures required each year necessary to keep the business running and/or growing. This is important as assets that have not been regularly maintained or upgraded can kill a deal if not disclosed early.
- List of all assets, their age, their remaining service life, and their fair market (used) value
- Provide maintenance schedules and logs
Working Capital
Working capital is cash-equivalent accounts and other materials needed to operate the business on a day-to-day business. Critically, working capital transfers with the business and is included in the price the buyer will pay for the business. This is because the business is transferred as a going concern.
It's important to identify which accounts are "working capital" accounts and to determine what level they need to be at to support the business operations and growth. You and the buyer will work together to determine this amount. Working capital is traditionally defined as Accounts Receivable (AR) + Inventory - Accounts Payable (AP) but other accounts are often included and will vary for every business.
- List of inventory, including inventory that is obsolete
- List of each item in AR, it's amount, terms, and payment status
- Divide and summarize AR into buckets (current, past 30, past 60, past 90, etc.) as makes sense for your business
- List of each account in AP and the amount, terms, and payment status
- List of other working capital accounts, and how they're used (e.g. unearned revenue, prepaid items, etc.)