How to buy a business » Blog Archive » Before You Purchase a Business – Ask For 3-Years Tax Returns
Before you go out and buy an existing small business, you need to make sure that the books and accounting are in order. You need to see a balance sheet, and P & L statement, and you need to verify that information. What did Henry Kissinger and Ronald Reagan say in foreign diplomacy and negotiation? “Trust, but verify!” And, it is my contention that you take this great advice when purchasing a used business.
Not long ago, I was doing a little very small business consulting. And I explained that prior to getting serious about buying the business the buyer need to get a balance sheet, P & L (profit and loss) statement and 3-years tax returns. Well, it turns out the business was a corporation signified by a “Inc.” after the name of the company at the top of the P & L, so, the company depending on the type of corporation would have to file corporate tax returns.
However, when asked to produce these, they said they ran into hard times and did not file in 2007 and 2008, and did not have the 2009 taxes done yet, which really are not totally due until September of 2010 with allotted IRS extensions. Interesting I thought, but then I happen to mention this question regarding buying a business from a Corporation, which failed to file its taxes for 2008 and 2009 this evening to a Tax Accountant at the Club House here.
He said this could be a huge problem; namely, not filing at all is a lot worse than filing and not being able to pay, as the IRS would set up a payment structure to come current. The 2009 taxes theoretically are not due until September if he’d filed an extension. But 2007 and 2008 are a real problem.
Now then, before I go any further, I need to make a statement to the reader here; CYA – I am not a Tax Attorney, this is not legal advice, and I recommend you verify this conversation (hearsay) with a licensed and professional Tax attorney Specialist. I am not qualified to give you legal advice, would never practice law without a license, and you cannot take anything I say as legal advice. Okay so, CYA aside, this is my opinion and why I think this:
You see, I also talked to someone at Starbucks a couple of weeks ago, and he told me a story where a company that failed to file taxes, and subsequently went bankrupt had paid him as an electrical/mechanical contractor for building remodeling. The other vendors plumber, TI guy, drywaller, etc. and the IRS never got paid, as the company ran out of money.
The Bankruptcy court came after the electrical contractor to repay the money for the services he’d rendered in full, and the BK Court said that money would be divided amongst the rest of the debts, and in 18-months, the electrical contractor would get a check, perhaps 10 cents on the dollar or his share. He had to pay back the money he’d been paid. Ouch. Thus, the $80,000 was paid back to the court, had he not paid, that BK Court could force him to pay it. Kind of like the folks who were paid back from the Bernie Madoff money prior to everyone finding out it was a Ponzi Scheme, even though they got their money back, it actually was owed to all the other people too. Everyone loses.
Likewise, according to the Tax Attorney I talked to, the assets of the Corporation (in this case Business For Sale Inc.) could be subject to a lien by the IRS, actually all assets of that corporation. If the president of that company sold those assets to the buyer, it could be fraudulent conveyance, and thus, even though they were in the buyer’s possession and a new corporation, the buyer might have to pay – or forfeit that equipment to satisfy the lien, and guess what, they’d have the business’s address and could put a lock on the door – tough luck.
Additionally, in this case we had the Business for Sale Inc. with no way to prove the balance sheet or P and L, other than 8-sheets of paper from a Quicken Program. And no Business Broker in their right mind would continue the listing with that giant red flag out front. Okay so, in this case as a very small business consultant might say – “I have no way to determine if this is so, all I can do is speculate?”
Nevertheless, there is sufficient reason to offer no more for this business than the value of the used equipment, and still, how can the buyer know if business owner or his corporation owns it all free-and-clear, or if they borrowed against a credit line at the bank on the assets of the company, not to mention the back taxes owed, which the Corporation’s President claims are owed. He may not have “really” made any money in those years, but assuming he did, he owes, and without those being paid, all the assets of that corporation are in limbo from what my friends and acquaintances tell me.
Thus, this business case study is a wake-up call to anyone buying a business. And if you find yourself in a similar situation, and if you wish to pursue such a business purchase further, I would recommend you talk to a specialist tax attorney before you proceed. You see buying a business involves risk, and when such variables and uncertainties are added to the equation it makes sense to seek counsel on this set of circumstances. Tax Attorneys normally have time on their hands to sit down to discuss things like this after April 15, and indeed, you’d really only need an hour or two to ask this question, and get the “correct” answer.
Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank. Lance Winslow believes that you should do your due diligence when hiring a contractor too; http://www.wallawallacontractors.com.
Note: All of Lance Winslow’s articles are written by him, not by Automated Software, any Computer Program, or Artificially Intelligent Software. None of his articles are outsourced, PLR Content or written by ghost writers.
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