Maintenance
Part of Seller preparation in the year before a sale: what actually needs fixing first
Where seller preparation requirements come from
Seller preparation requirements come from legal obligations, buyer diligence and lender conditions. See what sellers should prepare and what is optional.
Seller preparation requirements come from three places, and only one of them is the law. The others are the buyer, who will refuse to proceed without certain things, and the buyer's lender, whose conditions reach the seller second-hand but bind just as tightly.
Sellers who prepare for the first and are surprised by the other two lose deals in the final weeks. This page sets out all three, and then what is treated as a requirement but is not one.
What to take away
- The legal requirements are jurisdiction-specific. This page tells you which body to ask, not what the answer is.
- The buyer's requirements are the record. The lender's requirements are the record plus the absence of anything unusual.
- Preparing for a sale of this size warrants an intermediary, an accountant and a lawyer, because the three sets of requirements are checked by three different disciplines.
What the law and public bodies require
The entity itself. A company that is not in good standing with its state registry cannot cleanly be sold or have its assets transferred. Check the registry record for filings owed, and fix them before anyone else looks.
Public body requirements
- Entity in good standing with state registry
- Every due tax return filed
- Licenses, permits, registrations transfer rules listed
- Employment transfer, notice, entitlements rules checked
- Sale reported with purchase price allocation
Tax filings. Every return that is due, filed. A buyer's accountant will ask for several years of them and reconcile them to the accounts. A missing or amended return is a question the seller has to answer in a room where the buyer is holding the price.
Licenses, permits and registrations. Each one has a transfer rule set by the body that issued it: some pass with the entity, some must be reapplied for by the new owner, some cannot be transferred at all. Make a list, and for each one ask the issuing body what a change of ownership requires. This list decides whether an asset sale or a share sale is even possible, which is a structural question covered on the deal structures page.
Employment. What happens to employees on a transfer, what notice or consultation is owed, and how accrued entitlements are handled are set by law and vary by jurisdiction. Your lawyer will tell you the rule that applies; do not let the buyer's lawyer tell you first.
Reporting the sale. In the United States, the buyer and seller of business assets each report how the purchase price was allocated across classes of asset, and the IRS expects the two reports to agree. Its page on Form 8594 describes the statement. The allocation itself is negotiated as part of the deal, and it affects both sides' tax positions, so it belongs with your accountant before the price is agreed, not after.
What the buyer requires
A buyer's requirements are the record, and the record has to hold up under someone paid to find its weaknesses.
Buyer document requirements
- Financial statements reconciled to tax and bank
- Earnings figure on stated basis, adjustments traceable
- Revenue by customer with tenure and terms
- Owner role description no one else performs
- Leases, loans, guarantees, security interests documented
- Disputes live, threatened, recently settled
- Working capital target set in agreement
- Reason for selling that survives testing
The buyer's process for testing all of this is described in the diligence guide. Every item on the list above is something that process will ask for. Producing it quickly and completely is itself a requirement, because response quality is read as a signal about the business.
What the lender requires
If the buyer is borrowing, the lender's conditions arrive through the buyer, and a seller who does not understand them will misread the negotiation.
Lender conditions
- Earnings demonstrated from records, not adjustments
- Concentration and owner dependence disliked
- Seller financing ranks behind lender loan
- Some require seller transition period
The acquisition financing page sets out the lender's view; read it as a seller. Their requirements cap what a financed buyer can pay you, regardless of what the buyer believes the business is worth.
A seller who is asked, late in the process, to accept a deferred portion or a seller note is often being told what the lender required. Knowing that in advance changes how you respond.
What is not a requirement
Several things are treated as requirements and are not.
Required vs not required
Treated as required
- Valuation
- Buyer forms own
- Information package
- Raw record can proceed
- Cosmetic spending
- Earnings and risk priced
- Trading history
- Buyer and lender set view
- Confidentiality
- NDA from every buyer
Actually not required
- Valuation
- Formal valuation not required
- Information package
- Polished package optional
- Cosmetic spending
- Repainting, signage, website
- Trading history
- No minimum rule
- Confidentiality
- Silence from advisors not confidentiality
- A formal valuation. Useful, not required; a buyer will form their own.
- A polished information package. Helpful for a process run by an intermediary, but a buyer can proceed on the raw record, and a package that outruns the record does harm.
- Cosmetic spending. Repainting, new signage, a refreshed website. Buyers price earnings and risk, and neither moves.
- A minimum trading history. Buyers and lenders each set their own view of how many years they want; there is no rule.
- Confidentiality by silence. A confidentiality agreement is required from every buyer before information goes out; keeping the sale from your own accountant and lawyer is not confidentiality, it is preparing without the two people who know the requirements.
The narrative of what to do in the year before a sale, and in what order, is on the seller preparation page. This one is the list of what has to be true by the time you get there.
