Due Diligence for Buying a Business - Part 2

When working through a business broker to buy a business the due diligence process should be more efficient than when working on an acquisition without a business broker involved.
In Part 1 we talked about doing due diligence for the Sales Tax issues. Now in Part 2 we’ll talk about the business income tax return issues.

When conducting due diligence to buy a business we talked about “trust but verify”. Income tax returns are no different. In most cases the seller will provide the business buyer with tax returns for the business. The assumption is that the tax returns accurately reflect the results of the business operations, right? Well, sometimes they do and sometimes they don’t. However, your first step at this point is to ask the seller to sign an IRS Form 4506. This will allow you to get a copy of the tax return the seller actually filed with the IRS. The vast majority of the time the returns you received from the seller and the returns the IRS has are the same, sometimes they aren’t. If they aren’t the same there needs to be a really, really good reason.

If the seller was just trying to deceive you…run for the hills and find another business to buy from a seller that’s less deceptive. And don’t forget to tell the business broker, he will no doubt be just as surprised as you are.