It may seem odd, but as soon as you start up a business, if one of the possible exit strategies would be to sell, you should be thinking about the documentation you'll need to do that. It may be years down the road but the records often required in today's M&A environment can be overwhelming. If your recordkeeping has been shoddy, it can add significant time and expense to generate the documentation wanted by a potential buyer.


You don't want to complicate a transaction and add material costs (and thus reduce the purchase price) just because you didn't have the necessary paperwork in order. So what kind of paperwork and information will you be asked for in the "due diligence process?" Here's a list of some common items.


Corporate Documentation:

  • Articles of incorporation, bylaws, minutes, subscription agreements, shareholder agreements and similar documents for a Limited Liability Company (often referred to as an LLC).
     

Tax Returns:

  • Copies of properly filed federal and state income tax, employment tax, state and local sales/use tax, property tax and other returns. If you do business in other countries, compliance with foreign tax requirements.
     

Financial Information:

  • Income statements, balance sheet (audited, if available), deferred revenue, working capital, bank account information, revenue recognition policies, accounting procedures, debt, loan information and balances.
     

Management Team:

  • Bios, employment contracts, salaries, management incentive plans and stock options. (Be aware that background checks and Internet searches about executives may be conducted.)
  • Non-compete and/or non-solicit agreements
     

Operations:

  • Computer systems and IT security
  • Maintenance of equipment, vehicles, facilities
  • Strategic relationships, key vendors, suppliers
  • Contracts with vendors and independent contractors
  • Facilities, including parking
  • Anticipated space needs in the future.
     
  • Salaries, overtime, bonuses, profit sharing
  • How your business handles employee evaluations, discipline and terminations
  • Whether any employees work remotely or from home
  • Instances of non-compliance with federal, state and local laws
  • Employee handbook
  • Offer letters, contracts and non-compete agreements with employees
     

Employee Benefits:

  • Retirement plans, including vesting and employer match programs
  • Health insurance programs, including whether you have any former employees under COBRA
     

Government Regulations:

  • Licenses, permits, and required correspondence with government entities
  • Compliance with public filing requirements

Sales and Marketing:

  • Pricing of products and services
  • Per customer revenue
  • Customer retention statistics
  • Competitors
  • Commission structure for sales people
  • Lead generation and tracking of leads in the pipeline
  • Advertising/ arketing programs and attendance at trade shows

Products and Services:

  • Inventory (cost, value and average levels)
  • Obsolete or slow moving items
  • Pending products under development
     

Legal Matters:

  • Pending litigation, claims, major disputes, settlements
  • Ownership and protection of intellectual property
  • Instances of non-compliance with the Sarbanes-Oxley Act; the Patriot Act, Occupational Safety and Health Act; the Fair Labor Standards Act, the Consumer Product Safety Act and other applicable federal and state laws
     

Real Estate:

  • Title to owned real property
  • Mortgages and other liens
  • Environmental concerns

Intellectual Property:

  • Ownership
  • Licenses
  • Adverse claims

Insurance:

  • Policies including business liability insurance, life, auto, product liability, directors and officers, casualty, workers' compensation, accident/injury reports
  • Claims histories
     

Valuation:

  • Professional valuation appraisals


As you can see, the information that may be requested in M&A transactions can be quite detailed. Potential buyers and partners want full disclosure about operations so there are no surprises. Compile and update documentation incorporating this information so you are as prepared as possible.

This checklist only contains some of the items you may be asked to produce. The exact information depends on the business, the potential buyer and the industry involved. If you have questions about how to prepare for a sale, consult with your attorney and tax advisor.