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An Overview of the Essential Documents Involved in the Sale of a Business

Selling a business goes well beyond setting a price and finding a buyer. 

In reality, the process is complex, involves a diverse range of stakeholders, and, as we’ll explore, many different types of documents.

From NDAs to financial statements, having all of the required documents to sell your business is key to a smooth and painless transaction. But, as many business owners find out, collecting and preparing these documents for review can be challenging and confusing.

Every document plays a crucial role in the sale process, serving specific purposes at specific stages. Understanding the nuances, purposes, and timing of each document can be daunting. These aren’t just bureaucratic formalities; they lay the groundwork for a transparent, legally sound, and compliant sale.

A well-documented sale process minimizes disputes, misunderstandings, and potential legal issues. Let’s review what essential documents business owners must prepare during the sale readiness process

At G-Squared Partners, our Sale Readiness team has supported dozens of M&A transactions, some exceeding hundreds of millions of dollars in value. Our experienced professionals assist with various financial matters, from cleaning up a business’s books to leading the due diligence process on behalf of the seller. 

Non-Disclosure Agreement (NDA)

A non-disclosure agreement (NDA) is a legally binding agreement between two parties. It prohibits the disclosure or use of confidential information.

In the context of a business sale, NDAs protect sensitive information about the business itself. This could include:

  • Financial information
  • Operational information
  • Strategic information
  • Intellectual property (IP)
  • Customer information
  • Employee data

Ensuring the sale process remains confidential during negotiations or other phases of the sale is paramount, and NDAs are one critical tool in maintaining privacy.

NDAs help prevent information leaks, leaks that can lead to a tarnished company reputation, a hit to market value, and even staff morale issues. Without proper NDAs, there’s also the risk of this confidential information finding its way into the hands of malicious competitors.

For the selling party, NDAs are essential. They’re the way business owners and sale readiness teams ensure shared information isn’t misused or inappropriately disclosed. NDAs offer a level of security and assurance that allows the seller to share details with potential buyers while limiting risk exposure. 

Before diving deeper into discussions or sharing business details, securing signed NDAs from potential buyers is mission-critical. There are also three-way NDAs that can bring suppliers into the dialogue — helping buyers get a clear understanding of these business relationships without risking information leaks.

Financial Statements and Tax Returns

Financial statements offer unparalleled insight into a company’s fiscal health. 

In most cases, there are three primary statements:

  • Income Statements: shows revenues, expenses, and profits/losses.
  • Balance Sheet: documents assets, liabilities, and the equity in the business.
  • Cash Flow Statements: illustrates cash inflows and outflows.

Having comprehensive, up-to-date financial statements is critical during a business sale, and buyers are sure to scrutinize every detail. Offering outdated or inaccurate statements can quickly sour the relationship between buyer and seller, leading to trust issues, reduced offers, and even the failure of a deal.

Adherence to Generally Accepted Accounting Principles (GAAP) can ensure transparency, reliability, and compatibility with financial statements and other documents. Buyers will typically ask for at least three years of financial data. This helps them understand possible trends, risks, and the growth potential of a business. 

In some cases, these documents will need to be re-stated to correct inaccuracies or align with GAAP standards. Make sure to consider any EBITDA add-backs from one time expenses or the owners personal expenses. A sale readiness team can prove invaluable for this task.

In addition to financial statements, it’s also important to include forward-looking projections and KPIs that indicate how the company is expected to grow in years to come. These are vital in demonstrating to potential buyers that the business they are considering acquiring is well-positioned for sustained success. Developing an ambitious yet achievable forecast backed by robust data may require the support of a sale readiness team. In many cases, sellers are obligated to meet these projections and KPIs to qualify for earn-out payments. 

When it comes to tax returns, providing information here can offer an additional layer of validation for the health and integrity of a business. They provide insight into a company’s historical earnings and can validate the income stated in other financial documents while demonstrating the health and compliance of an organization.

Confidential Information Memorandum (CIM)

A confidential information memorandum (CIM) acts as an in-depth presentation of a company’s operations, financials, and strategic positioning. Think of it as your business's resume, offering potential buyers a transparent glimpse into the company they’re considering purchasing.

During the due diligence phase, the CIM allows buyers to deeply understand a business’s value drivers and possible risks. Moreover, CIMs help buyers craft informed offers by giving them a clear look into a company’s full potential and value.

Without a CIM, buyers might have misunderstandings around expectations, which could mean unpleasant surprises during the due diligence phase.

Investment bankers, with their expertise in M&A transactions, create this vital document. More than that, they use the CIM as a pivotal marketing tool as, when done right, it portrays the business in the best possible light.

They’ll ensure the CIM is both comprehensive and strategically positioned for maximum interest potential.

While investment bankers play a key role here, the CIMs financial components demand deep insights into a company’s financial operations. As such, sale readiness teams and other experts like outsourced CFOs often step in to gather, organize, and present financial data effectively.

They work together with investment bankers to ensure financial information is accurate, consistent, and positioned to demonstrate the company’s financial health and future potential.

Letter of Intent (LOI)

Next on our essential documents list is a letter of intent (LOI). Essentially, this is a written document expressing the intention to enter into a transaction. Keep in mind this doesn’t necessarily bind both parties the way a purchase agreement contract would.

Think of an LOI as a precursor to a more formal contract.

So, what do they do if they don’t bind a buyer? Well, they offer a roadmap for the sale. It showcases buyer intent and sets the stage for negotiations. 

There are several key elements of an LOI:

  • Purchase Price: the proposed amount the buyer intends to pay.
  • Payment Terms: how and when payments will occur. 
  • Proposed Timelines: indicates milestones like due diligence or closing.
  • Exclusivity Period: a timeframe in which the seller won’t enter discussions with other potential buyers.
  • Potential Liabilities, Indemnities, or Warranties: points to guide the final contact creation.

LOIs might also include things like contingencies or clauses for potential deal-breakers.

Many times, LOIs integrate with NDAs. This ensures both an expression of intent and a guarantee of confidentiality. By combining these documents, you can further streamline the initial stages of the sale and cut down on paperwork while simplifying negotiations.

Purchase Agreement

A purchase agreement is a legally binding contract outlining the terms and conditions of a sale. It solidifies the commitment between buyer and seller while providing a roadmap for how the sale will proceed.

The purchase agreement will define the rights and obligations of both parties. This helps streamline the process and reduce uncertainties.

There are several key elements of a purchase agreement:

  • Purchase Price: the agreed-upon sum. It can be fixed or variable based on specific metrics.
  • Payment Terms: how the buyer will make payments (upfront, installments, etc.).
  • Representations and Warranties: assurances given by both parties that cover the business’s state, liabilities, and possible undisclosed issues.
  • Contingencies: specific conditions or events that need to happen to finalize the sale, like securing financing or achieving certain performance metrics.

Due Diligence Documents

The due diligence phase of the sale process is critical. Ensuring the right documents are available and accurate can make or break a deal. 

Transparency here is of utmost importance. Inaccuracies can quickly derail a deal, making it vital to provide a comprehensive picture that covers all the pertinent details. Incomplete or inaccurate information here can lead to legal disputes post-sale.

When it comes to documents involved in the due diligence process, here are a few you’ll most likely encounter:

  • Contracts: agreements between suppliers, partners, or customers.
  • Leases: property or equipment leases.
  • Licenses: any business, professional, or industry-specific licenses. 
  • Employment Contracts: agreements with key staff and management.
  • Permits: environmental permissions, operating permits, and more.
  • Intellectual Property (IP): any relevant patents or copyrights.

During the collection phase of the due diligence process, a sale readiness team will organize and gather all the relevant documents and prepare them for review. They can also play a critical role in fulfilling buyer requests for information, such as clarification or additional data.

This attention to detail provided by sale readiness experts ensures your business is ready for the scrutiny of due diligence. If any issues are exposed by this process, they can also assist in rectifying issues before they disrupt the sale.

Closing Documents

As the sale process reaches its conclusion, closing documents enter the picture. As the final step in the sale process, these documents seal the terms and conditions agreed upon during negotiations.

These documents finalize the sale and often include the following:

  • Bills of Sale: confirms the transfer of assets.
  • Assignment Agreements: transfers obligations and rights from seller to buyer.
  • Regulatory Filings: ensures legal compliance and may involve licenses and permit transfers.

Closing documents not only finalize the deal but also ensure that all assets and ownership are legally transferred to the buyer. From a protection perspective, these documents provide both parties with assurances on the negotiated terms and conditions of the sale.

They also provide clarity, outlining the responsibilities and rights of both the seller and the buyer.

G-Squared Partners: An Experienced Sale Readiness Team

During the sale of your business, you’ll need to gather, organize, and prepare various essential documents to ensure a smooth, transparent, and legally compliant transaction. Whether it’s collecting financial statements and providing NDAs or developing LOIs and CIMs, the expert perspective of a sale readiness team can offer unparalleled support and precision during these essential steps.

At G-Squared Partners, we’ve assisted dozens of businesses during the M&A process. We’ll ensure each document goes through meticulous preparation and execution — streamlining the sale process and helping maximize the deal's outcome.

To get started making the most out of the sale of your business, connect with the G-Squared Partners today.