Running your business takes a lot, often there is little time for much beyond the day-to-day while squeezing in time for other parts of your life. If the time to exit your business is approaching, knowing where to start and what information you need to get the ball rolling is just one more thing to add to your “to-do” list. 

This article covers some of the key information you will most likely need whether you are planning to sell your business or just sell the assets. We will go into more detail on why you will need to gather the following information:

  • Formation documents
  • Financial reports (balance sheet, p&l statements)
  • Tax returns
  • Leases & loan agreements
  • Summary of assets

Even if you are not ready to exit your business in the near future, it is wise to make sure you have access to this information and it is up to date so you are well prepared when the time comes.

Formation Documents

When you started your business you had to decide on the type of entity; were you going to operate as a sole proprietorship, LLC, LLP, S-Corp, C-Corp? Then you had to decide where to register this entity. This is probably something you decided years ago and have not thought about since then. Hopefully, you not only recall the type of entity you chose but you can lay your hands on the formation documents. Whether you worked with a local attorney or used a service like LegalZoom, Rocket Lawyer, or ZenBusiness, there are documents that were generated when you registered to operate your business in your state.

Whether you plan to sell your business, transition to a family member, or dissolve the business, you will need the information in these documents so that you can transfer ownership of the entity to the new owner or use the information when filing for dissolution. If you are unable to find a copy, contact your state controller’s office to obtain a copy. This can take a while so doing this before there is an immediate need is a good idea.

Tax Returns

Any and all taxes must be paid and if there are any fines or penalties, you will need to pay these as well. This applies if you are selling the business or dissolving the entity. It is routine for a prospective buyer to request tax reuters while performing due diligence on your business. 

In addition to the returns you filed, it is ideal to provide supporting documentation such as receipts in the event a new owner needs to access the information after you have transitioned out of the business. If you have any questions or concerns, checking with a Certified Public Accountant to review your tax records is worthwhile. 

Financial Reports (Balance Sheet, P&L Statements)

Your financial statements are used to establish value for your business and are one of the first items a prospective buyer will request to evaluate your business. Typically a buyer will request at least three years of profit and loss statements (income statements) as well as a current balance sheet. If your business was substantially impacted by COVID-19, a prospective buyer may ask for five years of information to understand how the business performed before the events related to the pandemic. 

If you use bookkeeping software such as Quickbooks or Xero, you can run these reports based on monthly, quarterly, or annually in addition to other useful reports such as a balance sheet. In order to obtain an accurate financial valuation for your business as well as provide a prospective buyer with the right information to understand your business, it is essential that your financial records are accurate and up to date before engaging

It is also important that you provide the same information to prospective buyers. If you engage someone weeks apart, make sure everyone receives updated information. 

Leases & Loan Agreements

In addition to understanding the revenue side of your business, a prospective buyer will want to understand the major liabilities, especially those that are vital to running your business. If you are a retail location or have a team that primarily works from an office or warehouse space, a copy of the original lease and any renewals is an important document to have ready for review. A prospective buyer will want to know the terms and conditions and obligations going forward. The same is true if your business has a loan from a bank to finance any aspect of the business such as a loan for the property, equipment, or a line of credit. 

These agreements are important and often a greater portion of the costs associated with running the business. Losing a lease in a preferred location can have a material impact on sales or the ability for a new owner to move the business to a new, less expensive location can increase profitability so it is important to allow others to review these terms and understand their options as they consider the future opportunities for the business. 

Summary Of Assets

Assets are both physical such as equipment, office furniture, or a warehouse or they can be “soft” such as software, customer lists, or know-how. A new owner is taking on both the liabilities and assets and needs to know what assets are owned by the business as well as the history of the assets. Keeping detailed records can help ensure a smooth transition and may even help increase the value of a business. 

Assets should be recorded on your balance sheet and in the event, you are unable to sell the business, you may be able to sell the assets. This is another reason why having an up-to-date summary that others can review is a tremendous help when exiting the business. It may require you to spend time creating a file that starts with the list of assets and adding information such as when it was purchased, service records, and primary users can ease the mind of a prospective buyer. 

Exiting a business is a process, planning ahead and gathering information before you are ready will not only save you time, it will also reduce some of the stress and help put your business in the best position to engage prospective buyers.