What Documents And Info Are Needed To Sell A Business?

The preparation for selling a business can be complicated. There is paperwork that needs to be organized before the business can be presented to buyers, along with more information that is needed as a sale progresses. All of this information is needed by potential buyers so they can determine if they are interested in the business and if they’d like to forge ahead with the purchase. Read below to learn more about many of the documents and info needed to sell your business.

Letter of Intent

The letter of intent (LOI) is a legal document that is needed for any business sale. It lists the conditions of the sale, due diligence terms, and any other important terms of the agreement that are critical to the deal. This can be created by the buyer or the seller, though it’s generally presented by the buyer. The due diligence in the letter of intent states that the buyer will research and verify all aspects of the business before the purchase.

Profile of the Business

There should be a summary of the business as well as a detailed profile describing the business. The summary should include the main aspects of the business, giving the buyer an idea of what the business entails. The detailed profile should include all pertinent information the buyer will need to determine if they are interested in the business and to ensure they know what to expect if they do purchase the business.  Generally, this is called a Confidential Information Memorandum or CIM.  Having sold many businesses, we know how to write an effective CIM, one that will pique the buyer’s interest.  While many sellers believe they intuitively understand this, the details to share are not always obvious.

Profit and Loss Statements

A profit and loss statement (P&L) needs to be provided for the past two to three years. These are also known as income statements.  This information helps the buyer see how profitable the business has been in recent years, so they can determine if it will continue to be profitable and whether they would like to purchase the business.  P&L’s contain more detail than tax returns.  More on business tax returns, below.

Current Balance Sheet

A current balance sheet shows the assets, liabilities, and owner’s equity of the business right now. This can be helpful in showing that the business is in good standing and that it is ready to transfer to new ownership. The current balance sheet should be as complete as possible.  Although the buyer will ultimately have a different balance sheet than the seller, the seller’s balance sheet lets the buyer know how the business is currently being financed.  Is the business running heavy on debt or is the business debt-free?

Cash Flow Statement

Buyers will want to make sure there is cash flow when the business transfers to them. A cash flow statement shows them what to expect for cash flow when they purchase the business as well as what they can expect the cash flow to be in the near future.  Although CNBC focuses on earnings per share (EPS) because it’s easy to understand, analysts and portfolio managers on Wall St. focus on a business’ cash flows.  Cash flows are less easy to manipulate than EPS.  Although small and medium-sized business sales are not as complicated as firms in the S&P 500, for instance, buyers will still maintain a heavy focus on cash flow.  While most small businesses file taxes on a cash basis, if a business keeps their financial statements on an accrual basis, it’s important to include a cash flow statement, so that buyer understands the true, underlying cash flow of the business.

Business Tax Returns

Gather the business tax returns for the business for the past three years. These show the bank and the buyer what was reported to the IRS.  While the “true” cash flow of the business needs to be separated from the tax returns, banks hold tax returns sacred.  They will eventually pull the tax returns directly from the IRS’ database.  If the loan is for less than $5 million and falls under the purview of the SBA, your business will ultimately be judged on the tax return.  This is sometimes confusing to business sellers, who often treat their businesses like a personal piggy bank.  While the net taxable income is not necessarily how we judge the cash flow of the business (it’s more complicated than that), once we complete our “add-backs”, the business will need to show some profits in order to get financing from the bank.  This is something to think about well in advance of selling your business. 

Lease Information

If the business is leasing space, a copy of the current lease should be included in the paperwork for the due diligence. The lease should state how much is paid, how frequently it is paid, and any other terms of the lease. This is especially needed if the buyer will take over the current lease instead of signing a new one.  Generally, the buyer will want to compare your lease on an apples-to-apples basis, so they will want to know your lease rate on a triple net (NNN) basis.

Insurance Policies

If there are any insurance policies for the business, please include the pertinent information in the paperwork for the buyer.  Include all current, pertinent insurance policies. Buyers may receive new insurance policies from a different insurance agent concurrently with the sale or they may use your agent to lock in the same rates and policies.

NDAs or Confidentiality Agreements

Most sellers will want to include an NDA or non-disclosure agreement before the due diligence process to prevent the use of confidential information about the business, while it’s on the market. This helps protect the seller’s and business’s interests. This should be included at the very beginning of the process, before the letter of intent or any due diligence, and signed by the buyer.

Personal Financial Statement

Normally, the business broker or M&A advisor will include a form for the buyer to fill out showing their personal financial situation. This information will be used by the broker to make sure the buyer is able to purchase the business. The information included in this form can be used if the seller is providing some financing and when the buyer goes to the bank for the senior piece of debt to buy the business.

Supplier and Distributor Contracts

Buyers will need to know about any contracts with suppliers or distributors for the business. Include all contracts so the buyer knows who the business currently works with, the terms of the contract, and all other necessary information.

Employment Agreements

Any basic information about the current employees will need to be provided to the buyer. This includes any current employment agreements as well as the details of those agreements. Since the employees will likely continue to be employed after the sale, the buyer will need to know the terms of any employment agreements.

Information About Seller Financing

If the seller is financing some of the sale, that general percentage that the seller is willing to finance will be needed by the buyer. While it is usually best to request a cash payment for the sale, as this is the easiest way to finalize the sale, the buyer may not have the entire amount and bank may not be willing to finance the entire purchase, which means the seller may need to finance a portion of the sale. However, we try to minimize seller financing in our deals, unless the buyer insists, or if the bank simply will not finance the entire amount.  The amount a seller finances for the business purchase can mean that, for tax purposes, part of the sale is considered an installment sale, which can have tax advantages.  Since the Seller receives payments over time, instead of all at once, this can lower capital gains and/or ordinary income for the Seller, which may prove advantageous. If this happens, there will be a legal agreement that details all of the terms of the seller financing.

Purchase Agreement

After the letter of intent is signed, and after some initial due diligence by the buyer, the buyer’s and seller’s attorney will begin work on a purchase agreement. This puts definitive terms onto the sale. Once we’ve finished banking, legal, due diligence, and the third-party business valuation (for SBA deals), the business can be transferred to the new owner.

What documents and info are needed to sell a business?  Selling a business does require a number of steps, but the entire process can be streamlined if the necessary documents and information are organized and ready, before the business goes to market. Sellers can get help with this part of the process from their business broker.  We will make it easy for you and make sure you don’t miss steps or documents that could be critical during the sale. If you’re ready to sell your business, CGK can help. Contact CGKBusinesssales.com to get help gathering the documents and info needed, before we go to market, as well as for help selling your business.

Scroll to Top