Tax Clearance Basics

seller's taxes are a punch in the face

When you buy a business, you should make sure that the seller is caught up on paying state taxes. If you don’t, you might find yourself stuck with the bill after closing. Worse yet, you might find that your shiny new business is encumbered by a tax lien.

In every state I’m aware of, the law allows state taxing authorities to assess the buyer of a business for unpaid taxes of the seller — even if the transaction is structured as an asset sale. Tax obligations follow the business assets, even if the purchase agreement says that the buyer isn’t taking on those liabilities.

Continue Reading

Why You Should Do Lien Searches Before You Buy a Business

Lien Search

When you’re buying a business, you should make sure that the business’s assets aren’t encumbered by liens. As I mentioned in Don’t Let the Seller’s Liens and Taxes Stalk You, even if you structure a business acquisition as an asset sale, the seller’s liens are your problem.

A lien is a legal right or interest that a creditor has in another’s property. If you’re buying a business whose assets are encumbered by a lien, someone else will have an interest in your property. If that someone is the seller’s creditor, that’s bad news for you if the lien is still intact after closing.

Continue Reading

Why You Should Review Your Important Contracts Before You Sell Your Business

caution

A company’s key contracts represent a valuable business asset. Thus, it’s crucial that the contracts remain in force as a business changes hands from the seller to the buyer when the business is sold.

As I’ve written elsewhere on this blog, the sale of a small business is usually structured as either an equity sale or an asset sale. In an equity sale, the buyer purchases the equity from the owner(s) of the company being sold (commonly referred to as the target company) — stock in the case of a corporation and membership interests in the case of a limited liability company. The business is transferred to the new owners, corporate or limited liability company entity and all, and the target becomes a wholly-owned subsidiary of the buyer. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity.

Continue Reading

Don’t Buy a Business Without Looking Under the Hood

looking under the hood

Before you buy a business be sure you’ve done your due diligence. Even in the days of Carfax, you wouldn’t buy a used car without looking under the hood to make sure the car’s in good condition. You’d probably also take it to a mechanic to have it examined by an expert. If you’d do this for a car purchase, why would you making a life-changing investment without making sure the business you’re buying is in good condition?

If you’re smart, you won’t.

You’ve probably heard the phrase caveat emptor — “buyer beware.” It means that it’s the buyer’s responsibility — not the seller’s — to ferret out issues that could affect whether the buyer wants to go through with the deal. The onus is on the buyer to ask questions and challenge assumptions.

Continue Reading