"Turns out, the former owner was more skilled at hiding tax troubles than running a clean business."

The Probable Reason for Low Business Value

María thought she had struck a gold mine when she snagged a medical lab for a steal. Not only was the price low, but she also secured a sweet payment plan. It was almost too good to be true—and, of course, it was.

Turns out, the former owner was more skilled at hiding tax troubles than running a clean business. A few weeks after the ink dried on the contract, María received a love letter from the tax office informing her that she owed a cool $75,000 in unpaid taxes. The seller, naturally, had conveniently "forgotten" to mention this little detail.

But María wasn't about to throw in the towel. After a few tears and a lot of deep breaths, she realized she could deduct the tax debt from her installment payments. Problem solved—but she learned a thing or two about buying a business the hard way.

What to Watch Out for When Buying a Business:

1. Taxes: The seller isn’t likely to shout from the rooftops if they owe back taxes. Ask for a tax transcript, not just tax returns, to see what’s really been paid. If the numbers don’t add up, walk away—quickly.

2. Loans: Loans can be sneaky. They might not show up where you’d expect, so check the UCC register to see what the company—and its owners—owe. If you find any skeletons in the closet, make sure the seller agrees to settle them before you finalize the deal.

3. Lawsuits: Lawsuits are like bad haircuts—hard to hide and potentially embarrassing. A quick search can reveal if the business has been involved in any legal scuffles. Better yet, let a lawyer do the digging.

4. Insured Events: Even a nose scratch can turn into a costly claim. Request information from all insurance companies the business deals with to check for any past incidents that could haunt you later.

5. Current Debts: Supplier debts and credit card bills aren’t always easy to find, but they can come back to bite you. Request bank statements and ask suppliers directly about any money owed.

6. Rent: Don’t assume the monthly rent is all that’s owed. The landlord might surprise you with a different figure at closing. Make sure they provide an estoppel letter stating the exact amount due.

What You Need to Remember:

• Start your search for encumbrances before making an offer.

• Make sure the seller agrees in writing to settle all debts by closing day.

• Always verify information with third parties like banks and landlords.

• If an encumbrance can’t be cleared right away, negotiate to hold part of the payment in escrow until it’s resolved.

Mistakes can happen at any stage, so be thorough in your due diligence. Want to know what to avoid? Check out our article on the “5 mistakes while due diligence.”

Checklist:

• Request a tax transcript, not just tax returns.

• Check the UCC register for hidden loans.

• Investigate lawsuits; consult a lawyer.

• Request insurance history from all providers.

• Verify supplier debts and bank statements.

• Obtain an estoppel letter for rent verification.

• Negotiate escrow for unresolved encumbrances.

For more questions about buying a business call us +1 (561) 867-7697