Category: Continued Diligence & Fact-Finding; Risk Allocation

What is it?

Typical tax representations address: What are the jurisdictions in which you are subject to taxation? Have you always filed your taxes? Have you always paid your taxes? Have you ever objected to your taxes and what was the resolution of that? Has a taxing authority ever audited you for your taxes and what was the result of that?

When does it matter?

Including specific tax-related representations ensure that liabilities imposed in the future based on the Seller’s pre-Closing actions or inaction stay with the Seller. It also gives the Buyer a better understanding of the Seller’s past behavior in terms of its desire and ability to comply with legal requirements. That information can be a valuable source of risk assessment for the Buyer, and it becomes especially important if the Seller will remain actively involved in the Business following the sale.

What to look out for?

You need to be upfront with your lawyer from the very beginning to make sure they have experience with situations like yours. Otherwise, see if they have someone they can recommend.

Also note, this section looks a little different if you’re doing an equity deal. Why? An asset deal is a new entity, starting from a blank slate (generally). An equity deal means you’re buying the entity, including the tax history. A Seller in an LLC should also expect to have questions and reps about personal ownership and payment. 

Does the nature of your business combined with the consummation of this transaction have any tax implications (for buyer and seller)? Certain types of transactions provoke certain types of taxes that will need to be paid. 

Understand and appreciate that we’re not just talking about income. The biggest bogeyman these days is sales and use tax. A buyer will want to know every jurisdiction in which you’ve filed and paid taxes. Should you have elsewhere?

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