Understanding Ownership When Selling a Business: “Cap Table” & Corporate Documents

When it comes to selling your business, proving ownership is more than a mere formality; it's a key step in the sales process that often becomes a stumbling block for some founders. Understanding the importance of sharing information about cap tables and ownership is vital for any owner looking to handle this process smoothly.

What is a “Cap Table”?

A capitalization table, or “cap table”, is a record that outlines the ownership structure of a company. It shows who owns what in terms of equity shares, options, and other types of securities. This is crucial during a deal, as it acts as proof of ownership, akin to having the proper title to your car.

The Role of Corporate Documents

Besides the cap table, important documents show your business is legal and valid. These include start-up papers (incorporation docs), tax ID numbers (EIN), and records of share ownership changes. Although meeting notes might seem minor, it's vital to have proof of a legal business type (S-Corp, LLC, or C-Corp) approved by the government.

The Legal Significance of Proving Ownership

As the owner, you might be well aware of your total control over your business. Still, when it comes to selling, "knowing" isn't enough; you must "prove" your ownership legally. This might involve showing the entire history of share ownership, especially if there have been changes due to personal matters, like a divorce. These details, often overlooked by some founders, can become a major source of concern, requiring a hefty effort to address during due diligence.

The Challenge of Due Diligence

Doing thorough research (due diligence) can reveal issues that many don't expect. It's not just about looking at cap tables and records, but also legally confirming any ownership changes. This process might be supported by outside experts like accountants (CPAs) or tax lawyers, specifically for complex things like reorganizations or details about buying stocks and assets.

The Impact on Transactions

The way you sell your business, whether it's selling stocks or assets, can greatly affect the transaction and its taxes. Knowing your company's ownership structure and having organized documents can make the sale smoother and might even lead to better financial results.

Conclusion

Selling a business involves many legal and financial challenges, especially proving ownership as noted above. Keeping your cap table and records clear and updated isn't just about following rules; it's about getting ready for a seamless change in ownership. This work may feel like a lot now, but it's crucial for your business's future. So, don't overlook these documents—they could make or break your deal.