Importance of Keeping Good Corporate Records

Buyers, investors, and underwriters. What do these three groups have in common? They all generally engage in pre-transaction diligence before moving forward with a transaction (e.g. purchase, investment, IPO, etc.) to ensure that there are no weird or non-market terms in organizational documents or other issues that may throw a wrench in the deal or investment. What else do these groups look for? Sometimes a pre-transaction diligence exercise is quite thorough. But as a limited example, most parties insist, at a minimum, on: (i) seeing stock options and warrants, (ii) seeing employee agreements (especially in regard to confidentiality/proprietary information/intellectual property), (iii) determining whether there are any missing board minutes, (iv) determining whether there are any undocumented (verbal) agreements with customers, suppliers, vendors, etc., (v) evaluating insurance, permits, licenses, etc., (vi) looking at accurate financial records, and (vii) analyzing compliance with law. If any of the items in this limited example don’t check out, are missing, or are a mess, any potential transaction may be delayed (which may be costly) or fail (which may be even more costly).

Most business owners and executives should not try to do pre-sale diligence "clean-up" while simultaneously trying to run a company and negotiate a sale. Often when an executive tries to do all three, mistakes can be made and/or one of these items will not receive the attention it needs.

So, what should be done? Organize corporate records now. Use any down time to organize business records, and get help (don’t do it alone). Many companies use secure data rooms/storage for all business records that contain clearly labeled files for organization (corporate, employment, financial, commercial agreements, etc.). Once a data room has been created and populated, updating the data within the site, and folders within the site, is relatively easy to do in real time (or at least makes the job less cumbersome when deal deadlines require fast action). Taking affirmative steps to organize corporate/business records now will make your business look more professional to buyers and investors, will often cause a business deal to go faster, and will often prevent a business from being subject to increased scrutiny and renegotiation of deal terms (sale price adjustment, post-close indemnification terms, etc.) after diligence but before closing (something most sellers prefer to avoid).