Checklist · Business
Preparing to Buy or Sell a Business: A Practical Checklist
26 U.S.C. § 1202
- Type
- Checklist
- Jurisdiction
- National
- Date
- 2023-11-26
- Topic
- Business
This checklist follows a business sale from two years before going to market through the final escrow release. The seller sequence covers the preparation that raises value — cleaning financial statements, documenting add-backs, reducing owner dependence and customer concentration, fixing worker classification, and confirming the entity's tax structure while elections are still available. The buyer sequence covers screening, the letter of intent, and a complete diligence request list organized by category. A shared sequence covers the purchase agreement, the consents and approvals that actually control the closing date, and the closing itself. A final sequence covers the post-closing period: the working capital true-up, the escrow, the earnout, and the surviving obligations on both sides. Deadlines that cannot be recovered are marked, and each item is written so that a non-specialist can act on it the same day.
Preparing to Buy or Sell a Business: A Practical Checklist
Business > Buying and Selling a Business | Published 26 November 2023 - Updated 6 July 2026 | UpLaw - uplaw.us
⭐ Two facts organize this checklist. A business that is prepared to sell is worth substantially more than the identical business that is not. And a deal is delayed by consents, licenses, and lien releases far more often than by disagreement over terms.
Sequence A — Seller preparation, two years out
A1. Financial
☐ Move personal expenses out of the business, or begin documenting them contemporaneously so they are provable add-backs later. ☐ Set owner compensation at a defensible market level, or document the difference. ☐ Remove non-working family members from payroll, or document the arrangement. ☐ Move to reviewed financial statements if the transaction size warrants it. ☐ Reconcile the tax returns to the financial statements and fix the differences. ☐ Clean up the balance sheet: write off dead receivables, reserve obsolete inventory, and remove personal assets. ☐ Separate related-party rent and set it at market, or plan to adjust for it. ☐ Build a rolling twenty-four-month monthly financial history. ☐ Track revenue by customer for at least three years.
A2. Tax structure
☐ ⚠ Meet with a tax advisor about entity structure at least two years before a sale. Some outcomes depend on elections and holding periods that cannot be created retroactively. ☐ Evaluate qualified small business stock treatment under 26 U.S.C. § 1202, and rollover under 26 U.S.C. § 1045. ☐ If the business is a C corporation, model the double tax on an asset sale and consider whether an election under 26 U.S.C. § 338 will be available. ☐ Understand how allocation under 26 U.S.C. § 1060 will affect the after-tax result, especially recapture on equipment and ordinary treatment of a non-compete under 26 U.S.C. § 197. ☐ Confirm real property gain treatment under 26 U.S.C. § 1231. ☐ Review reorganization options under 26 U.S.C. § 368 and contribution structures under 26 U.S.C. § 351 if buyer equity may be part of the consideration; corporate-level distribution consequences are at 26 U.S.C. § 336.
A3. Legal housekeeping
☐ Reconstruct the minute book, stock ledger, and any option or warrant records. ☐ ⚠ Resolve every ambiguity about who owns equity, including verbal promises to current or former participants. ☐ Review the buy-sell or operating agreement for transfer restrictions and rights of first refusal. ☐ Get every material customer and supplier relationship into a signed written contract. ☐ Obtain written IP assignments from every employee and contractor who created anything. ☐ Confirm software licenses are held by the entity and are transferable. ☐ Resolve or reserve for pending litigation and demand letters. ☐ Confirm insurance is adequate and identify whether policies are claims-made (needing tail coverage).
A4. Operational
☐ Reduce customer concentration where possible. ☐ Reduce owner dependence: document procedures, promote a manager, transfer relationships. ☐ ⚠ Fix worker classification before a buyer finds it. See worker classification and employee or contractor. ☐ Audit exempt classifications and wage-hour practices. ☐ Address deferred maintenance and capital expenditure backlog. ☐ Confirm licenses are current and identify which are transferable.
Sequence B — Going to market
☐ Decide whether to use a broker or investment banker; if so, read the listing agreement for the commission, the exclusivity term, and the tail period. ☐ Prepare a blind teaser and a confidential information memorandum. ☐ Assemble a data room before buyers ask, not after. ☐ Require a signed confidentiality agreement with a non-solicitation of employees before any disclosure. ☐ ⚠ Stage disclosure. Financial detail early; customer identities, employee names, and pricing late. ☐ Screen buyers for capacity: proof of funds, financing commitment, and transaction history. ☐ Plan the employee communication before a rumor forces it. ☐ ⚠ Keep running the business. A decline during diligence resets the price.
Sequence C — Buyer screening and letter of intent
C1. Before spending money
☐ Obtain three years of tax returns and twelve months of bank statements. ⭐ These two documents tell you more than the pitch materials. ☐ Identify the seller's reason for selling and test it. ☐ Identify customer concentration and owner dependence immediately. ☐ Identify licenses required and confirm — with the agency — whether they transfer. ☐ Identify whether the real property has any industrial, automotive, agricultural, fueling, or dry-cleaning history. ☐ Compute a preliminary valuation and a walk-away price.
C2. The letter of intent
☐ State price, structure, and the treatment of working capital, cash, and debt. ☐ State which provisions are binding — exclusivity, confidentiality, expenses, governing law — and which are not. ☐ ⚠ Limit exclusivity to 45–90 days with milestones. Leverage moves to the buyer when exclusivity begins. ☐ Identify the key closing conditions now: consents, licenses, financing, environmental. ☐ Identify the indemnity architecture in outline: survival, basket, cap, escrow. ☐ Address deposit disposition on each termination scenario. ☐ Identify who pays for what during diligence. ☐ ⭐ Negotiate the LOI as if it were the final agreement. In practice, it usually is.
Sequence D — Due diligence request list
D1. Financial
☐ Financial statements, 3–5 years, with the level of assurance identified ☐ Tax returns, same years, federal and state ☐ Monthly financials, 24 months ☐ Bank statements, 12–24 months ☐ Accounts receivable aging with concentration ☐ Accounts payable aging ☐ Inventory listing with obsolescence analysis ☐ Revenue by customer, 3 years ☐ Gross margin by product or service line ☐ Capital expenditure history and forecast ☐ Debt schedule including capital leases, factoring, and merchant advances ☐ Related-party transactions and balances ☐ Budget and forecast, with prior-year accuracy
D2. Legal
☐ Formation documents, amendments, minute book ☐ Equity records: ledger, options, warrants, convertible instruments ☐ Owner agreements: buy-sell, shareholder, operating, partnership. See the business divorce. ☐ ⚠ All material contracts, with assignment and change-of-control clauses flagged ☐ Customer and supplier contracts ☐ Litigation: pending, threatened, and 5 years closed ☐ Judgments and settlement agreements ☐ Licenses and permits, plus written agency confirmation of transferability ☐ Insurance policies and loss runs ☐ Intellectual property: registrations, assignments, licenses, open-source inventory, domains ☐ UCC, tax lien, and judgment lien searches in every jurisdiction. See taking, perfecting, and enforcing a security interest or lien. ☐ Real property: leases, title, survey, estoppels ☐ Privacy practices and breach history. See data privacy and security and responding to a data breach and exercising privacy rights.
D3. People
☐ Employee census with role, tenure, compensation, and exempt status ☐ ⚠ Contractor list with classification analysis ☐ Employment agreements, offer letters, restrictive covenants, and their assignability. See trade secrets and restrictive covenants and protecting trade secrets and handling a departing employee. ☐ Benefit plan documents, filings, and funding status ☐ Multiemployer plan participation and withdrawal liability estimate ☐ Workers' compensation claims history and experience modification ☐ Employment verification records ☐ Open agency charges and internal investigations ☐ Union status and collective bargaining agreements
D4. Operational, environmental, regulatory
☐ Facility condition and capacity ☐ Equipment list with age and maintenance records ☐ Technology inventory, license transferability, and security posture ☐ Supply chain concentration and alternatives ☐ ⚠ Phase I environmental site assessment where property history warrants it. Liability under 42 U.S.C. § 9607, definitions at 42 U.S.C. § 9601; the defense depends on pre-acquisition inquiry. See environmental contamination and cleanup and the plume under the property. ☐ Industry-specific compliance records ☐ Professional ownership restrictions, if applicable. See professional licensing and occupational discipline.
Sequence E — The purchase agreement
☐ Define the purchased assets and the excluded assets exhaustively. ☐ Define the assumed liabilities narrowly and the excluded liabilities explicitly and by name. ☐ Define working capital with the included and excluded accounts listed, and ⭐ attach a sample calculation using real numbers. ☐ Specify the accounting principles and that they control over later changes. ☐ Negotiate the representation set and the knowledge and materiality qualifiers. ☐ Prepare disclosure schedules early; they are where the real facts live. ☐ Negotiate indemnification: survival, basket type and amount, cap, fundamental representations, escrow, exclusive remedy, sandbagging, and the third-party claim procedure. ☐ ⭐ Create specific indemnities with dedicated escrows for known, quantified exposures — do not bury them in the general basket. ☐ Consider representation and warranty insurance if the size supports it. ☐ Draft the non-compete: activity, geography, duration, non-solicitation, confidentiality. See what walks out the door. ☐ Draft the transition or consulting agreement with a term, hours, and an end date. ☐ Draft closing conditions, including required consents and any material adverse effect condition. ☐ Draft termination provisions and any break fee. ☐ Agree the purchase price allocation under 26 U.S.C. § 1060 and provide for consistent reporting. ☐ General drafting principles apply — see drafting, reviewing, and enforcing a contract and contracts.
Sequence F — Consents, approvals, and the closing date
⭐ Assign each item below to a named person in week one. These are what delay closings.
☐ Landlord consent to assignment; expect the landlord to seek term, rent, or guaranty concessions. See commercial leasing for small business and the lease that outlives the business. ☐ Estoppel certificates from landlords confirming rent, term, deposits, and no default. ☐ Lender payoff letters with per diem, and scheduled UCC-3 terminations. ☐ ⚠ Written releases of the seller's personal guarantees, obtained at closing, not promised afterward. ☐ Customer and supplier consents where change-of-control clauses exist. ☐ Franchisor consent, transfer fee, and training requirements. ☐ License and permit approvals — ⭐ set the closing date from this timeline. ☐ Antitrust notification under 15 U.S.C. § 18a if thresholds are met; rules at 16 C.F.R. part 801, 16 C.F.R. part 802, and 16 C.F.R. part 803. Substantive standard: 15 U.S.C. § 18. ⚠ Do not gun-jump — 15 U.S.C. § 1, 15 U.S.C. § 2. ☐ Tax clearance certificates for sales and use tax and employment tax in every state, with a holdback until they issue. ☐ Bulk sale notice, where required. ☐ ⚠ WARN analysis and notice — 29 U.S.C. § 2101, 29 U.S.C. § 2102, exemptions at 29 U.S.C. § 2103, damages at 29 U.S.C. § 2104, administration at 29 U.S.C. § 2105. Check state mini-WARN statutes. ☐ Health continuation responsibility under 29 U.S.C. § 1161, allocated in the agreement. ☐ New employment and restrictive covenant agreements for employees the buyer hires. ☐ Insurance bound effective at closing, including tail coverage on claims-made policies.
Sequence G — Closing day
☐ Confirm all closing conditions satisfied or waived, in writing. ☐ Execute the purchase agreement (if signing and closing are simultaneous) and all ancillary documents. ☐ Bill of sale for tangible personal property. ☐ Assignment and assumption agreement for contracts and assumed liabilities. ☐ Intellectual property assignments, in recordable form. ☐ Deed and transfer tax filings for real property. ☐ Vehicle title transfers. ☐ Lease assignment and landlord consent, executed. ☐ Non-compete and non-solicitation agreement, executed. ☐ Consulting or transition services agreement, executed. ☐ Escrow agreement, executed, and escrow funded. ☐ Payoff letters and lien release authorizations delivered. ☐ Personal guarantee releases, executed originals in hand. ☐ Resignations of officers and directors, where applicable. ☐ Officer's certificates and secretary's certificates. ☐ Legal opinions, if required by a lender. ☐ Closing statement and flow of funds, agreed in writing before wires move. ☐ Estimated working capital certificate. ☐ Purchase price allocation schedule consistent with 26 U.S.C. § 1060. ☐ Keys, passwords, credentials, banking access, and physical records transferred. ☐ ⚠ Confirm wire instructions by telephone to a known number. Wire fraud in closings is common and the money does not come back.
Sequence H — After closing
H1. First thirty days
☐ Record deeds and file assignments. ☐ File UCC terminations for released liens; confirm the buyer's lender filings. ☐ Transfer utilities, insurance, licenses, registrations, and merchant accounts. ☐ Confirm payroll, benefits, and workers' compensation are effective day one. ☐ Communicate with customers, suppliers, and employees per the agreed plan. ☐ Preserve all seller records received.
H2. Sixty to ninety days
☐ Prepare or review the working capital true-up statement. ☐ Calendar the objection deadline; ⚠ missing it makes the other side's calculation final. ☐ Engage the neutral accountant if disputed, following the agreement's procedure exactly.
H3. Twelve to twenty-four months
☐ Calendar the escrow release date and the survival expiration for each representation category. ☐ ⚠ Give indemnity notice before survival expires, even if the claim is not yet quantified, if the agreement permits. ☐ Track earnout measurement periods and reporting obligations. ☐ Exercise audit rights on schedule if the earnout is disputed. ☐ Seller: monitor compliance with the buyer's ordinary-course covenants. ☐ Seller: confirm every personal guarantee was in fact released. ☐ Buyer: complete any post-closing integration commitments made to employees or customers.
The deadline table
| Item | Deadline | If missed |
|---|---|---|
| LOI exclusivity | 45–90 days | Seller may re-market |
| Environmental assessment | ⚠ Before closing | Purchaser defense lost |
| HSR waiting period | Statutory | ⚠ Penalties; deal risk |
| WARN notice | 60 days before employment loss | ⚠ Per-employee daily damages |
| Landlord consent | Before closing | Assignment ineffective |
| Tax clearance | Before releasing price | ⚠ Buyer liable for seller's tax |
| Working capital objection | As defined, typically 30 days | Other side's number is final |
| Escrow release | 12–24 months | Funds released |
| General representation survival | 12–24 months | ⚠ Claims barred |
| Fundamental representation survival | Longer | Claims barred |
| Earnout objection | As defined | Buyer's calculation stands |
If something goes wrong
The seller misrepresented something. Check survival, basket, cap, and escrow first — then decide whether the claim is worth pursuing. Give notice immediately; negotiate afterward.
The working capital true-up is $180,000 apart. Read the definition and the sample calculation. Most disputes resolve once both sides apply the exhibit rather than their instincts.
The earnout produced nothing and the buyer changed the business. Look for the ordinary-course covenant, the accounting-consistency covenant, and the audit right. If none exist, the claim is difficult; if they do, it is straightforward.
A guarantee was never released. Send a written demand to the lender or landlord with the closing documents attached, and to the buyer under the agreement's indemnity.
The acquired business is failing. Assess restructuring — business bankruptcy and restructuring and restructuring a business or filing a business bankruptcy — and preserve indemnity claims before limitations run.
Related resources
Full doctrine: buying and selling a business. Plain-language overview: the deal that comes with the company. Forms: the business sale and acquisition toolkit.
Related: starting and running a small business, forming and launching a small business, the small business formation and compliance toolkit, the contract drafting and breach response toolkit, business and self-employment tax, and the business divorce and dissolution toolkit.
⭐ The whole checklist reduces to one instruction: make the list in week one, put a name and a date on every line, and work it weekly. Deals do not fail on price. They fail on the item nobody owned.
Appendix: the diligence findings table
Use this to decide what each finding actually requires. Most problems are not deal-enders; they are pricing, indemnity, or condition problems. Treating everything as a crisis is how buyers lose good businesses, and treating everything as noise is how they inherit someone else's liabilities.
| Finding | Price adjustment | Specific indemnity + escrow | Closing condition | Walk away |
|---|---|---|---|---|
| Misclassified contractors, quantifiable | ☐ | ⭐ ☐ | ||
| Unpaid sales tax, quantifiable | ☐ | ⭐ ☐ | ☐ clearance certificate | |
| Payroll tax withheld but not remitted | ☐ | ☐ | ☐ | ⚠ ☐ |
| Customer with change-of-control right | ☐ | ⭐ ☐ consent | ||
| Non-transferable license | ☐ restructure or delay | ☐ if impossible | ||
| Environmental impairment, defined | ☐ | ☐ | ☐ remediation plan | ☐ if undefined |
| Unassigned intellectual property | ⭐ ☐ assignments | |||
| Disputed equity ownership | ⚠ ☐ must resolve | ☐ if unresolvable | ||
| Pending litigation, quantified | ☐ | ☐ | ||
| Undisclosed litigation discovered by buyer | ☐ | ☐ | ☐ | ⭐ ☐ reassess everything |
| Cash off the books | ⚠ ☐ | |||
| Deferred maintenance | ⭐ ☐ | |||
| Key employee at risk | ☐ | ☐ retention agreement | ||
| Overstated inventory | ⭐ ☐ | |||
| Related-party lease below market | ⭐ ☐ | ☐ new lease | ||
| Lender will not release guarantee | ⭐ ☐ payoff at closing | |||
| Open-source license conflict in software | ☐ | ☐ | ☐ remediation | |
| Multiemployer plan withdrawal liability | ☐ | ☐ | ☐ estimate letter | ☐ if very large |
⭐ Two rules make this table work. First, a quantified exposure belongs in a specific indemnity with its own escrow and its own survival period — never inside the general basket, where a one percent threshold and an eighteen-month clock can eliminate it. Second, anything that must be true for the business to be worth what you are paying belongs in the closing conditions, not in a representation. A representation gives you a lawsuit; a condition gives you the right not to close.
Appendix: questions to ask the seller in the first meeting
⭐ These eleven questions produce more useful information than the first three weeks of document review, and they cost nothing.
☐ Why are you selling, and why now? Listen for the answer behind the answer. Retirement, health, and partner disagreement are ordinary. "The industry is changing" is worth pursuing. ☐ What would you fix if you were keeping it another five years? The honest sellers answer this well, and the answer is your capital expenditure and staffing plan. ☐ Who are your three largest customers, and how long have they been customers? Then: are those relationships with the company or with you? ☐ Which employee, if they left tomorrow, would hurt the most? Then ask whether that person is under an agreement and whether they know about the sale. ☐ What does a bad month look like? Sellers describe good months unprompted. ☐ What is the last thing that went badly wrong, and what did you do? This tests both candor and management quality. ☐ Are there any handshake arrangements — with customers, employees, family, a former partner, or a landlord — that are not written down? ☐ Has anyone ever claimed to own part of this business? ☐ Has any agency ever investigated, audited, or cited the business? ☐ What have you promised to employees about what happens after a sale? ☐ What is the one thing you would want to know if you were buying it?
⚠ Write down the answers and date the note. If a representation later turns out to be false, a contemporaneous record of what the seller said in the first meeting is evidence — and if the answers are inconsistent with the documents produced in diligence, that inconsistency is the most valuable finding you will make.