27 Oct Your Companies Do Business With Each Other. A Buyer Will Notice
Many owners of multiple entities that I meet have the same setup. One LLC holds the real estate. Another runs the operations. Sometimes a third owns equipment or intellectual property. The operating company rents from the real estate entity, borrows from the holding company, and shares staff across the group.
Almost none of it is in writing.
But all those informal arrangements can bite when someone wants to buy the business. Then every undocumented deal between related entities becomes a question in diligence, and questions in the middle of a transaction cost money.
What the Buyer’s Team Actually Does
An advisory team will run a quality of earnings analysis, which means rebuilding the company’s financials from scratch. Every related-party transaction gets flagged. Rent the operating company pays to the owner’s real estate LLC? If it’s below market, the report adjusts EBITDA downward to reflect what a buyer would actually pay after closing. If it’s above market, the buyer asks why and wants a credit.
When acquisitions price off a multiple of EBITDA, small adjustments create large price swings. A $100,000 reduction to EBITDA in a deal priced at a seven-times multiple costs the seller $700,000. Undocumented management fees, informal intercompany loans, and shared employees with no cost-allocation agreement all get the same treatment.
The buyer’s advisory team doesn’t take the seller’s word for any of it. They want signed agreements with payment histories behind them.
The Liability Exposure You Didn’t Know You Had
Undocumented intercompany arrangements create a another risk. If two LLCs share employees, office space, bank accounts, and decision-making, and there’s nothing in writing to separate them, a creditor or plaintiff can argue they’re really one entity. Courts in multiple states have allowed claims to reach assets in a “separate” LLC by showing the entities weren’t actually operated as separate businesses.
The legal analysis turns on whether the entities maintained their own identities in practice: separate books, separate bank accounts, separate governance. Not just at formation, but in daily operations. An owner who runs three LLCs through one checking account is building a record that undercuts the very separation those LLCs were supposed to provide.
The rules on this differ by state. Some jurisdictions apply a strict standard that requires evidence of fraud or injustice before allowing a claim through. Others take a broader view, looking at whether the entities were genuinely separate in function. If a business operates across state lines, the owner may face different standards depending on where the claim is brought.
The Upside of Getting It Right
Clean structure doesn’t just survive diligence. It creates options.
An owner who holds real estate in a separate entity with a properly documented lease can sell the operating company and keep the building. After closing, the buyer pays rent to the former owner under the existing lease. That’s an income stream that outlasts the deal.
An owner with documented intercompany agreements can show a buyer exactly which costs continue, which fall away at closing, and what the replacement costs will be. That clarity speeds the timeline and reduces the escrow or holdback the buyer demands for uncertainty.
Think of it like staging a house before listing it. Clean paperwork shows you didn’t cut corners and sends all the right messages to the buyer’s team that you’re a well run business. But a messy file gives the buyer’s team something to pick at in every round of negotiation, and those picks add up.
What Clean Structure Looks Like
The specifics depend on the business and the state, but the checklist is consistent: written operating agreements for every entity, formal leases at arm’s-length terms for any property one entity rents from another, management services agreements documenting any shared services, loan agreements with stated interest rates and repayment terms for any intercompany lending, separate bank accounts and books for each entity, and member or board resolutions documenting major decisions.
Owners may skip doing this on grounds that it’s unnecessary because “all the business entities belong to me.” But that thinking falls apart when someone else is looking at the books.
When to Do This
The time to put these agreements in place isn’t when the letter of intent lands on your desk. It’s at least six to 12 months before going to market. That window gives the agreements a payment history, lets the financial statements reflect arm’s-length terms, and puts the quality of earnings report on the seller’s side rather than against it.
Owners who start this work early walk into diligence with clean answers. Owners who wait get surprised by adjustments they didn’t see coming, and by then the buyer is the one setting the terms.
Is your multi-entity structure deal-ready?
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For business owners: If you’re two to five years from a sale, the time to look at this is now. Garza Business & Estate Law works with a limited number of owners preparing for exit each year. If what you’ve read here raised questions about your own situation, you can apply here:
This article is general information, not legal advice for your situation.