The probable reason for low business value

Sofia B. (her real name was changed to preserve the confidentiality of the client) bought a medical laboratory. She was very happy that she purchased it for a relatively small amount.

At the same time, she also managed to get the payment by installments.

The low price in this transaction was determined by the fact that the business owner had an absolute mess in documents, including tax reporting.

But the joy was short-lived. Soon, Sofia received a letter from the tax office that she owed $75,000 for unpaid taxes. During the sale, the seller concealed that he had a debt.

Sofia couldn`t hold back her tears and constantly thought about how to find a way out of this situation.

Luckily for Sofia, everything ended well. She had an installment plan, and Sofia deducted the amount of tax arrears from this amount.

What you need to pay attention to avoid finding yourself in a similar situation.

  1. Taxes. Information about the payment of taxes is not publicly available. But the seller can provide you with a tax transcript. Unlike tax returns, the transcript will be able to talk about the taxes paid and the presence of arrears. Learn more about tax documentation checks in our article.
  2. Loans. The overwhelming majority of information about loans is contained in open sources. There is a register of credits and creditor claims called the UCC. You can view the contents of this register as soon as you know the name of the company and the names of the owners. Owners can take out some loans for the company, but personally. This needs to be determined even before making an offer. This is a much safer approach if everything you find in this registry is listed in the sentence. You can even stipulate that you will make such an offer only if the owner is obliged to pay all debts.

In our practice, there was a case where the manager took the phone number with him, the one in all the advertisements, and then twelve-year-old debts also surfaced.

  1. Lawsuits. This information is also open. You can independently see if there are claims (whether open or already closed), but a lawyer will do it much more professionally.
  2. Insured events. An employee walked, fell, scratched his nose, went to the clinic and an insured event occurred for occupational injury insurance. To check the presence or absence of a history of insured events, information is requested from all insurance companies with which the company has an agreement.
  3. Current debts. Debts to suppliers and credit card debts are not publicly recorded. Therefore, you need to request a bank statement and ask the supplier (s) for information about what is owed him.

During the due diligence, you should identify all creditors, which are likely to be banks. They can get the status of credit accounts at the time of closing a deal. The information never coincides with what is written in the accounting reports. The second option for lenders is suppliers. There should be a list of debts owed to suppliers indicating the name and amount owed on the closing day. And these amounts must be confirmed by suppliers, at least via email.

  1. Rent. The rental debt can be very different from the monthly payment. The landlord must provide an estoppel letter on the closing date, which is the landlord's statement of how much is owed.

In almost every case, tenants are surprised at the amount owed; in half of the cases, they win the conflict. Therefore, it is necessary to initially resolve this issue. 

Learn more about the nuances of renting in our article "Lease agreement - what to look for."

Take a quick look at our Business Due Diligence class to be fully equipped when it comes time to review employees.

What is important to remember:

Проверка обременений на что обращать внимание 3

  • The search for encumbrances can begin before the offer is made.
  • For each type of encumbrance, the seller must explicitly confirm his agreement to pay on the closing day.
  • The reliability of the information must be verified with the opposite party (with the bank, suppliers, landlords, etc.).
  • If it is impossible to remove the encumbrances, this can be delayed for several years. It is necessary to negotiate with the seller withholding part of the money on the lawyer's account (escrow) until the encumbrance is removed.

It is important to remember that at any stage of the verification process, you can make mistakes. To avoid this, read the article "5 mistakes while due diligence".

Read What Our Clients Say (Google Reviews)

  • Absolutely thrilled with my experience at Florida Buy and Sell and especially working with Alyona! She was professional, courteous, and incredibly knowledgeable, making my business buying transaction smooth and hassle-free. Their expertise and dedication to customer satisfaction really stand out in the industry. Highly recommend for anyone looking to buy or sell business with confidence. A true gem in Florida’s market!
  • I enjoyed working with Alyona Safonova as a business broker, and I cannot recommend her highly enough! Alyona is a true professional with a deep understanding of the market and a talent for finding the perfect match for her clients. She guided me through the entire process with expertise and patience, always available to answer my questions and address my concerns. Her dedication and hard work resulted in a successful sale that exceeded my expectations. If you're looking for a knowledgeable, reliable, and results-driven business broker, look no further than Alyona Safonova! 💼👍
  • I've been dealing with Florida Buy and Sell in my professional capacity as an immigration attorney assisting foreign individuals in buying businesses in the U.S. I can attest to the high degree of diligence displayed by Florida Buy and Sell in all business transactions I witnessed. My primary point of contact, broker Alyona Safonova, has always been responsive to my clients' inquiries and meticulously collected all financial documents necessary for the effective transaction.