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Necessary due diligence considerations when selling a business

On Behalf of | Jun 15, 2022 | Business Transactions

Selling a business requires the perspectives of the buyer and the seller in Oklahoma. Both sides need certain due diligence procedures to get the deal done. Buyers usually prefer asset deals as an asset purchase transaction or as a purchase of their ownership interest. An asset purchase allows the buyer to avoid exposure to known and unknown tax liabilities.

Seller’s allocating sale price for asset deals

When selling a business, people want the maximum amount of the sale price for favorable long-term capital gains tax rates. After business transactions, gains are in a higher tax bracket than ordinary income. Additional gains from assets older than a year have favorable long-term capital gain rates. If the value of assets is higher than their tax basis, the taxes are lower for long-term gains. The seller would want to minimize the amount of the sale price allocated to inventory and receivables.

Buyer’s allocating sale price for asset deals

The buyer’s tax perception in an asset purchase deal is usually the opposite of the seller’s. Buyers want to maximize the amount of the sale price allocated to inventory and receivables. The buyer must amortize allocated parts of the purchase price to most intangible assets. Assets purchase treatment is automatic if the seller is a sole proprietorship or a single-member LLC for tax purposes. During these business transactions, the buyer buys assets directly from the seller.

Corporate stock deal as an asset deal

Under a tax-law exception, the buyer and seller may treat a qualified purchase of their corporate stock as a purchase of the business assets. The buyer wants to allocate assets of the sale price to write it off. The buyer wants to minimize the number of assets that depreciate over long periods, but land costs can’t depreciate. The seller wants to ensure they’ll collect any of the buyer’s deferred payments and get tax results they like.

The buyer may execute extra buyer due diligence procedures to find any unseen liabilities. A public records search allows a buyer to identify any liens or judgments against the business. A review of tax returns allows a buyer to review a company’s payroll, income, sales and property. Tax returns uncover any underpaid taxes due as well. The buyer may examine policies to find any loss payable endorsements to the insurance company.