Transactions & Tax Returns

Mar 12, 2015

United States corporations have a filing date for their federal tax returns of Monday, March 16 in 2015. If the sale of a privately held company is a business objective for 2015, it is recommended you file your 1120 or 1120S tax return on time.

Tax returns filed with the Internal Revenue Service (IRS) are the most import documentation in the sale of a privately held company with the most recently filed tax return being valued significantly over previously filed tax returns. Tax returns are traditionally referenced at five stages of the sale process and it is important that all parties involved in a transaction deem the information as an accurate reflection of the historical, financial performance of the company.

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 practices with market information. Business owners should be cautious about employing a broker to sell their business that does not personally understand business valuation, as the same party marketing the business commonly will need to justify the business price to buyers, their accounting & legal professionals, and the banking community.

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 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 under writing during the interim period between when a tax return is filed and when it can be accessed in the IRS system.

A “win-win” transaction is facilitated in an environment of full disclosure. Full disclosure frequently starts with the review of the corporate tax returns of a business.

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 in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.