How to shield myself and investors from sellers misdoings
May 07, 2024
by a searcher in Denver, CO, USA
How best to protect yourself and investors in a transaction where the previous owner may have:
1) Taken cash (did not disclose to the IRS) - avoided corporate taxes
2) Paid employees cash off the books - avoided payroll tax
Current thinking, Asset Purchase, we would immediately pay all taxes moving forward, and create a claw back for liabilities within statute of limitation (e.g. 5-7 years for payroll taxes) that the business incurs as a result of the previous owners - I believe we can still be on the hook for sales tax and payroll tax.
Any other creative ideas here/other watchouts?
from The University of Chicago in Chicago, IL, USA
1) What profits you use for price/structure is your call,
2) Bank will look at TR
3) For most such sellers, financial statements do not reflect such revenue and expense. Accountant will not prepare if he/she knew such statements exist.
4) There are successor liabilities in an Asset purchase, Consult an attorney. Few I know are a) unpaid payroll taxes and wages, b) environmental, c) existing lawsuits, etc.
5) I have not heard of liabilities to the buyer associated with unreported revenue and wages in normal transactions. except one. A buyer bought the business in NJ. After the Asset sale, Seller's son who worked in father's business as an accountant went to IRS and disclosed unreported cash transactions. Seller, the father, got into trouble. I do not know the details after that except that the buyer had to cooperate.
6) Almost ALL businesses have some kind of accounting issue that can be challenged if IRS looked at it. This is true for both audited and unaudited statements.
from Massachusetts Institute of Technology in Tel Aviv-Yafo, Israel
seller’s note could help alleviate any issues - I think.
Insofar as possIble, there is always a book keeper / accountant on the seller’s side, and that is the contact I would engage with. To me it helped clarify some discrepancies, as well as get some insights about accounting decisions that were made (putting something as Liability vs Equity on the BS, for instance.
another area to look at is loans to and from the company and between the owner.