This guide outlines in simple terms the documents you should have in order to sell a business.
While selling a business is often emotionally charged, both the seller and buyer need more to act on than gut feelings when making their decisions. When looking to purchase, perhaps the buyer already decided to acquire a company like yours.
They just need to back that decision with hard facts. One way to do this is by going through critical documents and business history needed to sell a business..
Getting ready to sell a business
A business sale starts with you as the owner. Showcase your experience, and most importantly, the product or service that contributes to your revenue. While potential owners can buy into a concept or product, critical business information is what helps push the deal over the finish line.
By providing organized and well-prepared documents, buyer confidence increases, due diligence speeds up, and you have the potential to maximize the value of the sale. With this guide, you’ll know exactly what to prepare to sell a business.
Three key factors to set the stage for a successful sale are:
- Prioritize pre-diligence
- Reduce perceived risk
- Engage the right professionals
Key Financial Documents Every Buyer Will Request
The numbers play a fundamental role in business purchases. Financial records provide buyers with the information they need to make an informed decision. For instance, financial statements reveal key information such as profit or loss positions, whether the operation is solvent, and if there’s liquidity.
Besides reporting on financial health, statements should also relay the foundation for predictive financial trends through forecasts. Preparing your financial records can also indicate whether you’re in a position to sell. Brokers, accountants, and attorneys typically prepare these documents when you sell a business.
Essential Tax Documents for Due Diligence
Filing taxes is important for business compliance, and the help of a tax practitioner or other industry professional is essential. Companies in the US need to file both state and federal taxes.
Taxes play a role in the sale of the operation as they show taxable gains or losses in the process and whether it experienced asset abandonment. Tax filings should support claims made in financial statements: If tax records and financial statements don’t align, it could reveal possible red flags.
Professional Valuations: Establishing Your Business Worth
Professional valuations help your company command the sale price you’re hoping for. It shows how much your operation is worth when you sell a business, and should be performed by industry professionals such as brokers or valuation firms.
These methods to establish worth to sell a business include:
- Market Capitalization: Applicable only to publicly traded companies, this method calculates equity value by multiplying share price by total shares outstanding. It does not account for debt or cash and is not suitable for valuing private businesses.
- The formula is: Share Price multiplied by Total Shares Outstanding.
- Times Revenue Method: This formula is industry-specific and uses a common multiplier. For instance, a hair salon might multiply its revenue by a factor of 0.5 to determine value, while a SaaS company might use a factor of 3 or higher.
- Note: This method is not a reliable standalone method for most businesses since it ignores profitability and cash flow.
- Liquidation Value: This method is asset-intensive. It is the net amount that would be received if a company’s assets were sold off quickly, typically under distressed conditions. It doesn’t reflect the full fair market value.
- Earnings Multiplier: Also called the price-to-earnings ratio, this method uses a multiple of a company’s current or projected earnings (such as EBITDA or net income) to estimate value.
- Discounted Cash Flow (DCF) Method: This method estimates value by forecasting future free cash flows and discounting them to present value using a discount rate that accounts for risk and inflation.
- Book Value: The value of an organization’s total assets minus its total liabilities. It reflects the value on the balance sheet, not necessarily the market value. Book value is based on accounting values, not the current market value.
Corporate Structure and Legal Foundation Documents
When taking over a purchased business, buyers want to know that it’s free from risk (as much as any company can be). The records show the type of structure and who the owners are.
It should also show any subsidiaries or affiliates. Articles of incorporation, Articles of organization, or partnership agreements confirm this information when you want to sell a business.
Other legal documents that can impact the purchase include the certificate of good standing, buy-and-sell agreements, and any other paperwork that provides restrictions on the transfer of ownership. You should also share any licenses, permits, and compliance certificates.
Contract Documentation That Protects Deal Continuity
Prospective owners want to buy a business that keeps running without disruption. This means that the company should continue even when you’re no longer there. Documents that protect this changeover when you sell a business include leases, vendor contracts, and customer contracts.
The organization type may also require additional information, such as franchise agreements and partner relationships. It’s vital to clearly state change-of-ownership clauses and come to a workable arrangement with the buyer for smooth change management.
Human Resources Documentation for a Seamless Transition
Taking over a company often includes the staff, especially if continuation is important to the new owner. Payroll records, employee rosters, role descriptions, and contracts help demonstrate how well your business tracks its team.
HR documents to share when you want to sell a business include non-disclosure agreements and benefits summaries. These records help buyers assess the team structure and their resource obligations.
Cataloging Your Business Assets and IP Portfolio
An asset is anything your company owns that has a value or economic benefit. These include general items such as equipment and stock, but can also include less obvious assets or intangible assets such as trademark registrations, patents, and software licenses.
Customer Intelligence: Sales Records and Client Information
With sales information and customer data, the buyer has a better understanding of whether the business has a reasonable chance of continuing after the sale. Sales reports, customer retention data, and customer relationship management (CRM) exports are valuable data sets to provide to the prospective owner.
Just a word of caution if you are looking to sell a business: Maintain the integrity of critical information by ensuring the exchange remains confidential. IBEX Middle Market Business Brokers recommends having a professional prepare NDAs to help keep proprietary information confidential.
Summary
When your company’s sales records are in order, it shows the prospective owner that you’re organized. This already builds trust and reduces buyer hesitation, which can streamline the closing process.
