All green flags, but reluctance to share tax returns

March 13, 2025

by a searcher from Georgetown University - The McDonough School of Business in Cleveland, OH, USA

I've been searching for about three months, and coming from a big4 firm myself I've always sworn I would never move forward on a deal without reviewing tax returns.

Fast forward to now, and I've discovered a seemingly great business on many fronts. $4M revenue, $1.1M SDE, asking $1.8M on 85% seller financing. The business gets paid in full before delivering services and all prepaid revenue will be transferred at close. So at closing, cash transfer of $300K from me to Seller, swapped for approx. $1M from Seller to me.

I met the seller in person and saw the business in real life - offices, warehouse, inventory and all. Operationally, the business is sound with eight employees and software programs in place, with some room for improvement. Marketing is limited but there's a (very) long trail of content and tags from third parties, partners and customers demonstrating their work. Seller is happy for us to meet employees indirectly (as a "customer"). He seems like an incredibly kind person and I felt great about the entire thing, until I requested tax returns. He is reluctant to share them and feels it is a violation of privacy. Clearly an emotionally-driven guy, and he's been honest that he runs personal expenses through the business.

He has shared financial statements, and is happy for me to verify (proof of cash) in diligence, but doesn't want to share his tax returns.

I believe I can reasonably mitigate risk of moving forward with both: (1) extensive unilateral indemnification provisions in the purchase agreement (he is holding the note which would serve as escrow), and (2) condition to close upon verification of "target cash" in bank account.

The SBA is not a factor - all seller financing. What else would you consider here?

Reply by a professional
from Northwestern University in Chicago, IL, USA

Here's som thoughts: I would structure it as an asset deal so that you only get the assets and not the corp entity if possible.. There's always issues with an asset deal if there's lots of contracts that will need to get assigned, but you somewhat minimize exposure to liabilities. Also payroll, property tax and sales tax may follow despite structuring it as an asset deal so it's not full proof, but better than a stock sale. I would also, as you suggested, seek an indemnity on the taxes if he won't provide tax returns however I suggest drafting it as more like a special indemnity. Indemnification provisions typically have lots of mechanics that can muddle the payout, but a special indemnity that is specific to taxes makes it clear that if the seller breaches (no matter how small) you get the money right away, though in this case it would offset the note. Also, by the way, the note and purchase agreement should have a clear set off right so that if the seller breaches the tax rep the buyer's payment obligation gets set off on a one to one basis, otherwise, you would effectively be in breach if you don't continue to pay the note.

Reply by a professional
from University of Georgia in Los Angeles, CA, USA

Talk to the company's accounting firm. Also check on the accounting firm's reputation. Do they have a certified audit? Mention that you might want to take the company public and would they like to remain as the firm's accountant in the future? Ask if there is anything that would not survive a certified audit to go public when they would be the accountant. See if the accountant seems like THEY have nothing to hide and everything they have done will be sterling silver.?

+25 more replies.

Join the discussion