The due diligence process, during which the purchaser requests and analyzes large volumes of information, requires a huge time commitment from the sellers’ personnel. Unknown issues and issues which are known but have not been dealt with in the past, can rear their head during the due diligence process, interrupt the otherwise smooth flow of information exchange and, in turn, cause unnecessary pauses and extensions of the deal. To avoid this, it is wise to address these issues prior to seeking to sell the business.
Routine items that are easily buttoned down before negotiations begin include making sure corporate documents are in place, that employment policies are up to date and that intellectual property, such as trademarks, have been properly protected. Other issues are not so routine. This article will focus one of those more unusual, or less thought of, issues – sales tax.
The issue is – has the business properly collected, paid and reported all required sales tax. Unfortunately, this issue often arises for the first time during the due diligence process, when the purchaser asks about it. Many states have expanded the application of their sales tax statutes to more and more activities, particularly services, and to more ways that products or services are delivered, particularly on-line and out-of-state sales. Many sellers are surprised to learn during the due diligence process that sales tax had not been properly accounted for. The sales tax number not accounted for, when added to interest and potential penalties owed to state governments, can be a significant number and could result in part of the purchase price being held back at closing. This all can be avoided by conducting a sales tax analysis prior to entering into negotiations. The following questions should be answered: 1) which services and products the company provides are subject to sales tax, 2) are the means by which the company provides the services and products (on-line sales, shipments out-of-state) taxable, and 3) are any of the company’s customers (nonprofits, for example) are exempt from the payment of sales tax. The sales tax analysis can be laborious, given that the laws vary state by state. However, being up to speed on the issue and ensuring that the company is in compliance beforehand can save a lot of time, money and worry during the negotiation process. Look for the next issue – change of control provisions.
If you have any questions about this or any other M&A issue,
please contact Glenn Solomon at email@example.com or 443-738-1522.
ABOUT GLENN D. SOLOMON
firstname.lastname@example.org | 443-738-1522
Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
ABOUT OFFIT KURMAN
Offit Kurman, one of the fastest-growing, full-service law firms in the United States, serves dynamic businesses, individuals and families. With 17 offices and nearly 250 lawyers who counsel clients across more than 30 areas of practice, Offit Kurman helps maximize and protect business value and personal wealth by providing innovative and entrepreneurial counsel that focuses on clients’ business objectives, interests and goals. The firm is distinguished by the quality, breadth and global reach of its legal services and a unique operational structure that encourages a culture of collaboration. For more information, visit www.offitkurman.com.
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