Mark Pestronk
Q: I am beginning the process of selling my agency so that I can retire in the next few years. I am at a standstill with one potential buyer because of two things. First, the buyer wants to see my corporate tax returns, and I am reluctant to show them because I take so many possibly questionable deductions, such as travel, automobile and other expenses. Is it normal for a buyer to ask for tax returns in addition to our internal income statements and balance sheets? If so, should I be concerned about those deductions? Second, whenever I speak to the prospective buyer, he seems to change the formula for what he is offering, so I am never sure what he is going to finally offer. Should I worry that this buyer is not trustworthy, and if not, what should I do to pin him down to a specific, detailed offer?
A: Any smart buyer should want to conduct a due diligence process, and part of the process is reviewing a selling company's tax returns. So, it is normal for a buyer to ask to see tax returns for the most recently completed year and possibly one, two or three prior years.
The main purpose of reviewing tax returns is to compare the internal financials with the tax returns to see if they are reasonably consistent, or if they are inconsistent, to understand the reasons for the differences. There could be many reasons for inconsistency, such as cash basis accounting versus accrual basis accounting, carryover of losses, treatment of depreciation and deductibility of certain expenses.
In my experience, buyers are not very interested in whether you have been too aggressive in your tax deductions unless the buyer is going to buy your corporate stock, as the buyer may get stuck with a tax bill if the company is audited after the sale.
Since the vast majority of travel agency acquisitions are asset purchases, not stock purchases, I believe that most buyers would not care what deductions you have taken, as an asset buyer would generally not be responsible for any post-acquisition tax assessment affecting your corporation.
Even if the buyer somehow gets stuck with a tax bill due to your overly aggressive deductions, the acquisition agreement would usually give the buyer the right to deduct from any installment of the purchase price whatever it has to pay the government.
Note that I am not condoning improper business deductions. I am merely advising you not to be too concerned about what a prospective buyer might think of your tax returns. Just be prepared to explain any differences between them and your internal financials.
As to your second concern: If the buyer keeps changing the terms in every conversation, you should insist that the buyer send you a letter of intent setting forth the price and all the terms of the offer. Even though the letter is not binding, it will tend to pin down the buyer and keep the process moving forward.