Selling a Business: The Documentation

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Selling a Business: The Documentation

Are you selling a business? As either the seller or the broker?

If so, you’ve got to make sure that your documentation act is together.

Documentation preparation is one of the top five questions we get from the folks taking our course, “Learn How to Value and Successfully Sell Businesses“, especially if they plan to add business brokerage to their real estate practice.

A lot of sellers are unwilling to put in the effort necessary to think through and assemble the documentation that will almost always be needed to successfully sell their business. Of course, if they were REALLY serious about selling, they’d hire a professional business broker or M&A advisor to handle the heavy lifting but, as we all know, that is not how many sellers approach what is likely to be the most significant financial event of their life.

One of the reasons the majority of businesses that come to market without professional representation don’t sell is that business owners don’t put in the time necessary to prepare for the process. (Another is price, but that’s another story altogether.) And many owners grumble about having to produce all the necessary data when asked by a professional broker.

Well, that’s tough, Bucko.

If you want the business to sell, you have to have a minimum amount of documentation. If you want the process to go smoothly, you better bulk up your documentation folder.

Two Types of Documentation

There are really two categories of documentation that have to be considered: pre-marketing documentation – what is needed for the valuation – and post-marketing documentation – what is needed for due diligence. If you’re working with a seller, it’s a good idea to assign them the task of collecting all this documentation up front.

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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses, teaches how to value and sell businesses.

Become a Professional Business Broker…

If you’ve taken our course, you know that one of the steps to successfully sell a business is the preparation of an Offering Memorandum, or “Book on the Business”.

This document should be at a level of thoroughness so that a buyer would have almost zero questions – and all a buyer would have to do is confirm what the Offering Memorandum contains. This is when the due diligence documentation comes to the fore.

But before you can prepare an Offering Memorandum, you have to value the business and then establish a target price. You can’t do any of that without the valuation documentation. So, let’s look at that first

Valuation Documentation

When selling a business, we first have to determine what that business is worth.

Many sellers have an “exaggerated opinion” (to say the least!) of the value of their business. And many of these sellers will be well and truly disappointed when they get the truth.

But unless the broker has nothing better to do with their time, they are unlikely to take a listing without doing a valuation. They would, after all, like to believe there’s a real chance of finding a buyer. Properly pricing the business – that is, basing the price on the value – is the surest way to achieve this.

The basic documentation for determining value is pretty easy to identify:

  • Profit and loss statements for the last three to five years and year-to-date.
  • Tax returns for the same period
  • Balance sheet
  • Inventory
  • Description of work-in-process (if appropriate)

Due diligence, however, is another story.

Due Diligence Documentation

When selling a business, the documentation needed for the buyer’s due diligence is much more comprehensive.

Remember, if the Offering Memorandum is thorough, the buyer will have all the information they need but will want to confirm all the information it contains. The financial information should be confirmed by the valuation documentation. But what about all the other information?


We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses and to novice business brokers.

If you’d like to learn more, email me at joe@WorldwideBusinessBlog.com


The OM will include basic information about any leases the business is a party to as well as about any agreement – such as purchasing or supply contracts. Though the OM will include nothing more that a one- or two-sentence abstract of each, the due diligence process necessarily means providing copies – which means you HAVE to have copies to provide.

The same is true for any warranties and registrations.

This could apply to assets the business owns – such as trucks, equipment, or service warranties – as well as to products or services the business provides – such as, well, trucks, equipment, or service warranties.

And though the seller might feel that the financial records used in the valuation would be sufficient to confirm the numbers, they very often aren’t. Most buyers want to see supporting documents.

Such supporting documents would include bank statements for the past 12 months, invoices the business received from its suppliers and invoices it sent to its customers and clients.

A buyer would want to know what payment terms suppliers have given the business and if the business has been complying with those terms.

(And, incidentally, a professional business broker will ask a seller about the level of compliance with vendors’ terms because if the business has been assessed late fees or interest as a result of its non-compliance, those fees would be treated as discretionary during the valuation process – which will enhance the value of the business.)

The Bottom Line

When selling a business, there is a ton of information and documentation that has to be collected and categorized – and the larger or more complex the business, the more of this documentation will be needed.

But advising the seller about the need for extensive documentation will have two significant effects on our work as brokers.

First, if will make your efforts easier and more organized, a condition that will be obvious to the BUYER – and that will redound to your benefit in the future from referrals.

Dishonest Seller

Your client, the bad guy!

Second, should you be dealing with what could otherwise turn out to be a shady seller, once they know what is likely going to be required for the due diligence, they are far less likely to hide or misstate some important aspect of the business. And that, in turn, will help to eliminate any potential for embarrassment to you during the due diligence period when the buyer discovers something that should have been disclosed up-front.

And one final point to consider is how to store, guard and disperse what could be a quite large amount of documentation.

Consider using a virtual data room. You can find more information on VDR’s here.

As professional business brokers, we have an obligation to advise our selling clients of the likely extent of a buyer’s due diligence – especially if the business we’re representing is probably going to be thoroughly scrutinized. Even if the seller balks at providing everything you ask for, by requesting it all, you’ve put the seller on notice. Though the seller might grumble when the time comes that the data MUST be provided, they won’t be able to say that they weren’t warned.

If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe

#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com

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