Sale-readiness checklist

Buyers price what they can verify, so financial records are the foundation of any process.

• Three years of financial statements, reviewed or audited by an outside CPA firm
• Monthly financial statements closed within thirty days of month-end
• Accrual-basis accounting consistent with GAAP, including revenue recognition
• Trailing twelve-month results reconciled to annual statements and tax returns
• A schedule of add-backs with supporting documentation for each adjustment
• Owner compensation and related-party transactions identified and normalized
• Net working capital tracked monthly, with explanations for seasonal swings
• A current-year budget and a three-year forecast with stated assumptions
• Gross margin reported by product line, service line or customer segment
• Consideration of a sell-side quality of earnings report before going to market

The quality and durability of revenue often matter as much to buyers as its size.

• Revenue by customer for at least three years, with retention and churn analysis
• Customer concentration measured for the top one, five and ten customers
• Written contracts for major customers, with terms, renewal dates and change-of-control provisions
• Recurring, reoccurring and project revenue reported separately
• Backlog and pipeline reports reconciled to historical conversion rates
• Pricing history and evidence of the ability to pass through cost increases
• Sales and marketing processes that do not depend solely on the owner’s relationships
• Customer satisfaction, renewal or net revenue retention data where available

Documented, repeatable operations reduce perceived risk and support the case for growth.

• Written procedures for core delivery, production or service processes
• Key operating metrics tracked consistently and reported monthly
• Supplier list with spend, contract terms and alternative sources for critical inputs
• Facility leases reviewed for term, renewal options and assignment provisions
• A fixed-asset register with condition, age and expected replacement timing
• Maintenance and growth capital expenditures separated for the past three years
• Inventory counts, costing method and reserves for obsolete stock reviewed
• Capacity analysis showing how the business can grow without major new investment

Buyers are acquiring a team as well as a business and will assess whether it can operate without the owner.

• An organization chart with roles, tenure and compensation for all key employees
• A second tier of management able to run day-to-day operations
• Written employment agreements for key managers, including confidentiality and invention assignment
• Retention or transaction bonus arrangements considered for critical employees
• Employee handbook and HR policies current and consistently applied
• Contractors reviewed for correct classification under federal and state rules
• Benefit plans, bonus programs and any equity or phantom equity documented
• Succession plan for the owner’s responsibilities and relationships
• Compliance with wage-and-hour, immigration and workplace safety requirements confirmed

Clean corporate records and contracts prevent delays in diligence and documentation.

• Articles, bylaws or operating agreement, and all amendments, organized and current
• Board and shareholder minutes and written consents for major decisions
• A capitalization table reconciled to stock ledgers, option grants and any convertible instruments
• Shareholder or buy-sell agreements reviewed for consent, drag-along and transfer provisions
• Material contracts indexed, with change-of-control and assignment clauses flagged
• Pending or threatened litigation, claims and settlements summarized
• Licenses, permits and regulatory registrations current and transferable
• Intellectual property ownership confirmed, with registrations and assignments on file
• Insurance policies and loss history for the past five years

Technology risk now features in nearly every diligence process, not only in software companies.

• An inventory of core systems, software licenses and key vendors
• Ownership of proprietary code, with contractor and employee IP assignments in place
• Open-source components identified and license obligations understood
• Cybersecurity policies, access controls and multi-factor authentication in use
• Backup, disaster recovery and incident response procedures documented and tested
• History of any data breaches or security incidents and how they were resolved
• Compliance with applicable privacy laws and customer data-protection commitments
• Financial, CRM and operational data accessible in reports a buyer can verify

Tax structure affects both what a buyer will pay and what the owners keep, and it is best addressed well before a sale.

• Federal, state and local tax returns filed and reconciled for at least three years
• Sales and use tax nexus reviewed in every state where the company sells
• Entity type and tax elections confirmed, including the validity of any S corporation election
• Payroll tax filings and any open audits or notices resolved
• The likely consequences of an asset sale, stock sale, F reorganization or Section 338(h)(10) election modeled
• Real estate held inside or outside the operating company and the implications evaluated
• Estate, gift and trust planning coordinated with the expected timing of a sale
• State residency and any opportunities for qualified small business stock treatment reviewed with advisors