Transactions rarely fail on weaknesses; they fail on surprises. A problem disclosed at the outset is priced into the offer and set aside. The same problem found by the buyer weeks into diligence becomes a reason to reprice everything, because the question is no longer the problem but what else was not mentioned. The list below is how everything becomes a disclosure and nothing a discovery.
| What buyers request | What it proves |
|---|---|
| Recent years of income statements and balance sheets | The shape and direction of the earnings. One good year proves a good year, not a good business. |
| Recent years of business tax returns | That the books are real. Buyers read returns against the income statement line by line; the rest of the deal leans on it. |
| Revenue by customer | Concentration. The buyer will find it, so the question is whether it hears it from the seller with a plan attached. |
| Customer contracts and service agreements | The recurring base: what is contracted, at what price, renewing when. In a service company it is much of what the multiple stands on. |
| Licenses and permits, and who holds them | That the company can legally operate on the first day after closing, and what happens if a license is held in the owner's name rather than the company's. |
| Payroll, roles and employment agreements | Who runs what, what they cost and who might leave. Key people under agreement are an asset; key people on a handshake are a diligence question. |
| The premises lease, or the deed | Whether the buyer can remain and at what cost. A short lease with no renewal option is better solved before going to market. |
| Equipment and vehicle list, owned and financed | What actually transfers, and what debt comes with it. |
| Insurance policies and claims history | The risk record, and whether the operation is insurable at a normal price by its next owner. |
The tax return test
Of everything on the list, the returns typically matter most, because they are the only documents prepared for an audience the owner could not impress. When the income statement and the returns tell the same story, every other claim is easier to believe. When they diverge, every number in the deal becomes suspect, including the true ones.
It also answers a question owners sometimes raise privately: unreported cash is not sellable earnings. A dollar cannot be paid twice, once by not reporting it and once by selling it at a multiple. Buyers price what can be proven, and the time to begin proving earnings is some years before credit for them is sought.
When to begin
Before going to market, not after signing a letter of intent. Under an LOI the seller is on the buyer's clock, inside an exclusivity period, assembling documents at the worst moment and appearing disorganized while doing so. The same documents assembled early read as a company that runs properly, which is what they are evidence of.
Where this fits: the preparation step, before anyone is approached. Next in the series: reading the offer when it comes.