Corporate Law Blog

Addressing tax liabilities in a business sale an important task

When a business owner is working on selling his or her business, there is a lot of planning that goes into the process. One important aspect of selling a business is to work out a tax strategy. In any business sale, potential buyers are going to want to know about  the tax liabilities the company is carrying before they purchase the business.

In order to address any issues that come up during a potential buyer’s due diligence on these liabilities, obtaining records from each respective taxing authority will establish a clear picture for the potential buyer.  It can take some time to have these documents issued, though, and a potential buyer may or may not be willing to wait around to see the official status of tax liabilities. This can result in a buyer either moving on or taking the seller’s word, in which case the risk is that discrepancies that come up down the road can result in the buyer being held accountable for remaining taxes and having to work that out with the seller, potentially through litigation. 

A buyer may or may not choose to take that chance. There are a couple options for sellers who want to close the deal in these situations. One is to reduce the sale price by a set dollar amount in order to offset any leftover tax liability. Another is to place a certain amount of the sale proceeds and in escrow. Any remaining taxes would be paid from that amount. The specific amount in either approach depends on the degree of risk the buyer is taking, and how badly each party wants to make a deal. The advantage of these approaches is that the payment of tax liabilities is addressed from the beginning rather than after the sale is made. As mentioned, the latter could potentially require litigation, which could be costly.

When it comes to unknown tax liabilities that arise after a sale is made, this also needs to be worked out in the sales contract. Working with an experienced attorney to set the terms on these tax issues is critical in order to ensure smooth transitioning and to avoid legal issues down the road.