Due Diligence


Today’s question dealt with a seller saying there’s about $25,000 a year in cash business, and insisting it be factored into the price. I just turned down a deal because of a similar situation – because the seller refused to pay the back owed taxes on this cash component before selling. I can’t purchase the business knowing there’s a $50,000 tax liability attached. Even though I’m innocent and don’t owe that money, I’ve seen how this works with other businesses. The IRS assumes you are guilty till you prove yourself innocent, which can take years. Meanwhile, they take their money from you. How should this be handled?


While I agree that you must ALWAYS consider the inherent risks in acquiring a business, you will likely be structuring an acquisition as an asset purchase and setting up your own corporation and fictitious trade name. Since you will not be acquiring the stock of the corporation you are not effectively liable to the best of my knowledge. BUT, you MUST absolutely consult both an attorney and CPA on this matter.

Now, if the seller did not declare these revenues, I am not certain how you can assume that there is this tax liability altogether, and certainly, it is not incumbent upon you since you will not own the corporation. Rather, that falls to the seller. Furthermore, any purchase contract that you have in place will identify these potential issues and provide for an indemnity from the seller to you for these matters.

If, however, there are certain payroll tax issues/liabilities there may be some potential carry forward liabilities to you and again the best strategy is to verify with appropriate legal advisors.


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