Stock Sale and financial liability

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by a searcher from University of South Carolina - Darla Moore School of Business
in Charleston, SC, USA

2yrs ago

Stock Sale and financial liability

I am in LOI on a deal which needed to be done as a stock sale. In due diligence, finding that the seller did massive amounts of personal expenses through the business. It amounts to about $250K/year for 3 years in a row.

My CPA and attorney both say that it is possible to limit liability and potential penalty from IRS for such a situation, however I'm not convinced. Again, it's a stock sale and it is a concern.

Obviously, there are potential liabilities for other aspects of the company which the lawyer working on checking.

What are everyone's thoughts on this?

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reply by an investor 2yrs ago
from Columbia University in Dallas, TX, USA

I echo these thoughts. You may structure to address C-Corp by having a larger holdback/escrow, specific indemnities for tax that are dollar-one and uncapped. And there are other ways you can adjust to the added risk, but, at a minimum, you should it for the risk it is. Even if you are fully indemnified for DAMAGES, consider the time and resources you may have to devote to dealing with IRS getting involved, investigating, or imposing a penalty.

reply by a searcher 1yr ago
from Fort Hays State University in Wichita, KS, USA

There have been a lot of good insight in how to handle the risks/liability of a stock sale. The other factor that needs to be included in the equation is the lack of ability to gross up assets (and also depreciate these assets) with the stock sale. In my calculations an asset sale is worth quite a lot more than a stock sale.