Document each related-party arrangement as a buyer would need to understand it: identify the people and entities involved, describe the business purpose, preserve the signed agreement and amendments, reconcile payments and year-end balances to the general ledger, and collect evidence for how the price or terms were set. Show whether the arrangement continues, ends, or must be replaced after closing. Keep a separate schedule for accounting or tax adjustments. A transaction can require disclosure because of the relationship even when you believe its expense is ordinary or should be added back. The exact disclosure and tax treatment depends on the entity, accounting framework, and jurisdiction, so have qualified legal and accounting advisers review the final package.
Start with a complete related-party inventory
Begin with a population, not a single disclosure paragraph. List owners, directors, officers, family members whose interests may matter, entities under common ownership, landlords, lenders, suppliers, customers, service providers, and businesses that share employees, equipment, premises, or cash management. The relevant relationship can be direct or indirect. IAS 24 describes related parties through control, joint control, significant influence, key management personnel, and close family relationships, and defines a related-party transaction as a transfer of resources, services, or obligations whether or not a price is charged [1]. That is a useful completeness check even when IAS 24 is not the reporting framework for the business.
Ask each owner and senior manager to review the list and identify arrangements that do not appear in the accounting system. Include informal arrangements, recurring reimbursements, personal expenses paid by the company, company expenses paid personally, guarantees, loans, leases, shared services, and assets used by both the business and an affiliated entity. Record the source of each item, the date reviewed, and the person responsible for confirming it. Do not assume a small amount is irrelevant before checking the applicable reporting and sale-process context.
Create one schedule for each arrangement
For every item, prepare a short transaction schedule with the parties, relationship, business purpose, start date, current status, payment terms, renewal or termination rights, security or guarantees, annual activity, unpaid balance, and documents supporting the entries. Tie amounts to the general ledger, bank statements, accounts receivable or payable aging, payroll records, and the financial statements. If the arrangement is a series of similar transactions, show the period total and the underlying pattern rather than describing only one invoice.
Include a plain-language answer to five buyer questions: What does the business receive or provide? Why is the related party involved? What would change if that party disappeared? Are the terms written and consistently followed? What remains open at the proposed closing date? This format makes it easier to distinguish a genuine operating relationship from a personal item, a temporary owner advance, or an undocumented dependency. IAS 24 emphasizes the relationship, transaction information, outstanding balances, and commitments because users need to understand how the relationship may affect the financial statements [1].
Collect agreements and evidence of the actual terms
Put the signed contract, amendments, invoices, approvals, and payment history behind each schedule. If there is no signed agreement, say so directly and assemble contemporaneous evidence such as board or manager approvals, email instructions, recurring invoices, lease records, time records, delivery records, or bank confirmations. Explain any difference between the written terms and actual conduct. A buyer will usually care less about a polished label than whether the records consistently show what happened.
If the arrangement includes a lease, loan, management fee, shared employee, intellectual property, real estate, or guarantee, map the item to the asset, liability, service, or dependency it creates. Note change-of-control, assignment, termination, and consent provisions. Do not promise that an agreement can be transferred. Flag the provision for counsel to review under the governing contract and jurisdiction.
Support pricing without overstating an arms-length conclusion
A related-party price should be documented as an evidence question, not treated as arms-length merely because it appears on an invoice. Gather comparable third-party quotes, market listings, vendor rate cards, bids, cost build-ups, utilization records, or an independent valuation when appropriate. Record the date, source, geography, service scope, volume, payment terms, and adjustments. If no close comparable exists, explain the method used and the limitations instead of manufacturing precision.
The IRS says transfer-pricing documentation should support a reasonable method and reliable arm's-length result, and highlights functional and risk analysis, business context, comparability adjustments, and a clear summary of intercompany transactions [2]. Those U.S. tax rules do not automatically govern every private-company sale. They do provide a disciplined model for preserving the reasoning behind a price. Ask an accounting or tax adviser which local rules apply, especially for cross-border or controlled transactions.
Reconcile balances and settlement plans
Prepare a roll-forward for every receivable, payable, loan, accrued fee, owner draw, reimbursement, and guarantee involving a related party. Show opening balance, additions, payments, credits, interest, write-offs, foreign-exchange effects if relevant, and closing balance. Reconcile the closing amount to the ledger and explain differences. Attach confirmations or other support where available, while minimizing unnecessary personal information.
Then state the proposed treatment before closing. The balance may be paid, collected, forgiven, assigned, retained, or settled through a closing adjustment, but the correct treatment depends on the purchase agreement, financing, tax rules, and professional advice. Do not call a balance normalized simply because management expects it to disappear. A buyer needs the evidence and the agreed mechanism.
Separate disclosure from add-backs and normalized earnings
Use separate workpapers for related-party disclosure, accounting classification, tax treatment, and normalized earnings. The fact that an expense involves an owner or affiliate does not by itself prove that it is nonrecurring, personal, excessive, or an add-back. Conversely, a recurring expense may still need to be disclosed because the relationship, pricing, balance, or post-sale dependency matters. Show the ledger account, historical amount, proposed adjustment, rationale, replacement cost if any, and supporting evidence in separate columns.
Label assumptions as assumptions. If the buyer would need to hire a replacement employee, lease space, obtain a new vendor, or pay a different market rate, identify that possibility without inserting an unsupported forecast. A qualified accountant can assess tax and financial-statement treatment, while counsel can assess disclosure, representations, indemnities, and consent requirements.
Explain what changes after the sale
For each arrangement, choose a status such as continue with buyer approval, terminate at closing, replace with a third party, or requires further diligence. Explain the operational effect. A family-owned landlord may require a new lease. An affiliate may provide inventory, payroll, IT, transportation, or sales support. An owner may hold a license, guarantee a debt, or personally own an essential property. These are not merely disclosure labels. They are transition questions that affect continuity, working capital, and the buyer's view of risk.
Build a dependency map that connects the arrangement to people, locations, systems, permits, customers, suppliers, and assets. Include the proposed action owner and decision date. Do not assume a buyer will accept a verbal transition promise. Put material commitments into the transaction documents or a separate transition arrangement after advisers determine what is appropriate.
Use a controlled review process
Assign one owner for the schedule, one person to reconcile the accounting records, and a qualified legal or accounting reviewer for the issues that require professional judgment. Maintain a source column for every material entry and a change log for corrections. The SEC's guidance for public-company related-person disclosure stresses that information may need to be collected from related persons, matched with company records, and supported by disclosure controls and questionnaires [3]. A private sale does not automatically use SEC rules, but the control lesson is practical: ask the people who know the relationships, then test their answers against records.
If software or AI helps classify documents or draft a transaction summary, keep the source-of-truth records in the accounting system, contract folder, bank records, and signed questionnaires. The accountable human should verify parties, amounts, dates, permissions, and cited documents. Run a small pilot with a defined stop condition, such as an unexplained balance, missing agreement, or uncertain access permission. Do not allow automated tools to approve disclosures, contact counterparties, negotiate terms, or decide tax treatment.
Package the evidence for buyer diligence
Use a consistent folder structure: relationship register, transaction schedules, agreements, invoices and payment evidence, balance reconciliations, pricing support, tax and accounting workpapers, dependency and transition notes, and adviser questions. Apply access permissions based on need to know. Keep a redaction log when personal data or unrelated confidential information is removed, and preserve the unredacted source in an appropriately controlled location.
Before sharing, perform a final tie-out. Every schedule should identify its source records, every material balance should reconcile, every missing agreement should be disclosed, and every proposed adjustment should have a stated rationale. Have advisers review the package for the applicable jurisdiction and reporting framework. Acquivo gives business owners the entire sell-side process an investment bank would run, as software, with no success fee. It is user-operated software, so the owner and advisers remain responsible for permissions, judgment, approvals, and final disclosures. Acquivo is a software platform that delivers the entire sell-side M&A process, valuation, marketing materials, buyer matching, and deal management, on one platform for business owners, M&A attorneys, and boutique investment banks.
Key Points
- Inventory relationships before reviewing individual invoices, including informal arrangements, guarantees, shared resources, and owner balances.
- Tie every schedule to agreements, ledger entries, payment records, outstanding balances, and evidence of the actual terms.
- Support pricing with dated, relevant evidence and disclose limitations instead of asserting an arms-length result without analysis.
- Keep related-party disclosure, tax treatment, accounting classification, and normalized-earnings adjustments in separate workpapers.
- State whether each arrangement continues, ends, or must be replaced after closing, and assign a human reviewer to unresolved items.
Sources and references
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Educational information, not individual legal, tax, or investment advice. Consult qualified professionals for your circumstances. Acquivo provides software, not representation or negotiation on your behalf.