Part 2 – Can you Buy or Sell a Business Subject to Tax Liens?
This is the second article in our upcoming 3-part series on selling a business with tax liens.
Federal Tax Liens can disrupt the sale of a business in multiple different ways. Sellers want a top-dollar sale price. Buyers want to invest in a solid, profitable operation, preferably at an advantageous price. Neither buyer nor seller wants the government entwined in the transaction or in the transaction-related funding.
We identified the Top 3 Concerns for either buying or selling a business that is subject to a Federal Tax Lien. They include:
1) Liens are a clear indication to a buyer of a troubled cash-flow business.
2) Tax liens give the government enforceable rights in the company’s assets, which takes control from any buyer.
3) Tax lines result in fewer sale proceeds to the seller.
Without being technical, this article covers these few top concerns that both buyers and sellers might consider. They are explained in detail below.
For a full discussion about Removing Tax Liens, see the related video below. It addresses withdrawing liens by using IRS Form 12277.
2. Tax liens give the government enforceable rights in the company’s assets, which takes control from any buyer.
The lien represents a liability to the government. If a business has been issued a lien, then that liability secures the government’s interest in collecting the debt. That creates three different problems:
If the business sold its assets. — The government has the right to collect the value or the sale proceeds of any liquidated asset up to the amount of the lien. The government could also collect any valuable asset owned by the company in an effort to pay off the debt. No buyer wants someone else (like the IRS) to have those rights against a business that it just purchased.
If the owner sold the entire business interest (100% of the stock). — The business remains intact, retaining all its assets and liabilities, including the lien. However, all assets acquired by the continuing business, including cash accounts, remain subject to the tax lien until the lien is satisfied. Again, no buyer wants someone else (like the IRS) to have those rights against a business that it just purchased.
If the buyer must borrow,– Businesses are often purchased with borrowed funds, and the IRS’s rights in businesses subject to lien are a deterrent from completing the sale. Put plainly, and lenders will not approve funding if tax liens are to remain after the closing of the sale.
Again, this lack of 100% control makes the business less valuable, less marketable, and certainly less attractive. And less financeable, which impedes that big cash windfall from the sale.
Stay tuned for part three of this series.
We hope this article might help someone you know. There is more info on our Lien Removal page.
See this related article:
IRS Set 2 Traps for Payroll Taxes – How to Protect Yourself