The sale of a business is often a starting point for the business owner to gather and organize business records. Until then, record-keeping and document archiving usually take a back seat. As the business expands and contracts, employees come and go, and hundreds of policies, contracts, and agreements are adopted and signed, it is easy to lose track of details. However, missing, incomplete, or inaccurate records create unwelcome surprises during the due diligence process that may delay or even derail a sale. The effort of a proactive record review pays off even if the owner does not intend to sell the business by helping to identify legal risks and areas for improvement or to procure new financing.
Well-managed business books should include (at the minimum) the following records:
- Organizational chart for the business providing information about its structure, subsidiaries, and joint ventures.
- Capital structure details, including outstanding shares or membership interests, equity rights, options, stock grants, convertible notes, warrants, etc.
- At least three years of historical financial statements (with associated accounts receivable and payable aging reports, detailed inventory valuation reports, fixed asset records, and expense documentation).
- Tax filings, including federal and state tax returns, annual franchise taxes, Form 5500 for 401(k) plans, tax audits, and all related correspondence.
- Employment records, including HR agreements, employee handbook and policies, offer letters, contracts, NDA agreements, job descriptions for key positions, and current information on compensation and benefit plans.
- Contracts with customers, vendors, consultants, contractors, and other outside service providers.
- A list of top suppliers and customers of the business.
- Information relating to licenses and permits (industry or state-specific).
- Insurance policies.
- IT plans and policies.
- Intellectual property information, including trademarks, patents, intellectual property assignments, copyrights, domain names, and related filing and registrations.
- List of real estate and personal assets, equipment, and all related UCC filings.
- A list of any/all litigation and any threatened litigation, judgments, settlements, or injunctions.
Gathering all this documentation takes time, so it is vital to start chipping away at the critical areas and address problems as they arise. The best way to store business data is to have all records assembled and uploaded over time into cloud storage, where they can be easily shared. The documents should be organized using a clear structure and naming convention. The owner can then grant access to its financial and legal advisors, who can review the records and provide recommendations without unnecessarily taxing the limited resources of the management, HR, or IT teams. When the time for due diligence arrives, the business will be able to respond to buyer’s inquiries promptly and efficiently.
