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2017 Tax Returns the Foundation of 2018 Business Sales

2017 Tax Returns the Foundation of 2018 Business Sales

The original filing deadlines for 2017 federal business tax returns are March 15, 2018 for C Corporations operating on a calendar year (Form 1120), S Corporations (Form 1120S), Multiple Member LLC’s (Form 1065), Partnerships (Form 1065) and April 17, 2018 for Single Member LLC’s (Schedule C of Form 1040) and Sole Proprietorships (Schedule C of Form 1040).   If the sale of a privately held company or family business is a business objective for 2018, it is STRONGLY recommended you file your federal business tax return on time.

Federal tax returns filed with the Internal Revenue Service (IRS) are the most import documentation in the sale of a business with the tax return associated with the last completed annual period holding the highest value.  Tax returns are traditionally referenced at five stages of the sale process and it is important that all parties involved in a transaction regard the information as an accurate reflection of the historical, financial performance of the business.

The first professional traditionally evaluating previously filed tax returns is the business broker assessing the potential representation project.   If this party is affiliated with an established firm and possesses the relevant knowledge & experience, the individual will be able to provide a business owner with a professionally prepared opinion of the estimated market value of the business combining accounting, finance, & investment analysis with market information relevant to buyer demand for a specific industry and geographic location in the marketplace.   Business owners should be cautious about employing a mergers & acquisitions professional to sell their business that does not have a firm grasp of business valuation for companies in specific industries and/or locations and/or have comprehensive knowledge of the present market dynamics in the relevant business opportunity marketplace.  It is “best practice” to have the same party market a business that established the asking price for the company, as that individual will likely need to justify the business value to potential buyers, their accounting & legal professionals, and the banking community.  Business brokers that do not understand the “nuts & bolts” of business valuation fluently often have a difficult time achieving the maximum possible market value for a business when the price is placed under scrutiny by buyers, CPA’s, and business appraisers.

Once a business has been brought onto the market, tax returns are commonly made available to buyers evaluating the business for potential acquisition for review after being properly financially prequalified and asked to sign appropriate non-disclosure documentation.  Most buyers at this stage will rely on the accuracy of this information for purposes of assessing and valuing the business opportunity.    The underlying assumption being that since the information has been reported to the government, it has been vetted for accuracy prior to submission.

If parties reach agreement for the purchase & sale of a privately held company, the tax returns will next be referenced by the buyer’s accounting professional during due diligence.   The buyer has likely assumed the accuracy of the tax returns up to this point, but it is prudent to verify the information reported to the government at this transaction stage by reviewing bank statements, internal financial documents, and bookkeeping systems.  Amended tax returns are filed annually by the best-intentioned entrepreneurs.  A percentage of filed tax returns will have errors that need correction.   A detailed review of the historical financial records of a business by a buyer prior to acquisition is always is their best interest.

Due diligence completed, the tax returns are often attached or referenced in the legal documents associated with the transfer of ownership to provide a reference point in the future related to the financial health of the company and information provided at time of sale.

The final party potentially involved in a transaction that will review the tax returns of a privately held company is the bank financing the deal.   A bank funding an acquisition will file IRS form 4506-T, Request for Transcript of Tax Return, directly with the IRS to verify that the tax returns provided by the seller were the tax returns filed with the IRS.  If the information received by the bank does not match previously provided information a transaction will potentially be put in jeopardy.    It should also be noted that if a transaction is scheduled to be completed in March or April, it is prudent to personally file a corporate tax return at the local IRS office, so a stamped copy can be provided to the lender for underwriting during the interim period between when a tax return is filed and when it can be accessed in the IRS system.

“Win-Win” transactions are facilitated in environments of full disclosure.  Full disclosure frequently starts with the review of the federal business tax returns of a company.  It is strongly recommended if an entrepreneur wants to sell their business in 2018 that they file their federal business tax return on time.  If you are interested in learning about the process associated with selling a privately held company or family business for the maximum possible market value from an experienced, knowledgeable professional who will employ “best practices” throughout the sale process, we would welcome the opportunity to meet with you and convey why IBA has been the preferred company of entrepreneurs selling their businesses since 1975 in the Pacific Northwest.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.