© by Tax & Business Professionals

I. What is to be Purchased or Sold --Assets or Stock?

(a) Inventory
(b) Accounts Receivable
(c) Equipment
(d) Land

II. Total Purchase Price $ ?? Terms of Payment

(a) Down $ ??
(b) When
(c) When Balance Due
(d) Promissory note - terms
(e) Letter of credit
(f) Closing date

III. Inventory -- Use, Verification, Control

(a) Separately listed items or in bulk
(b) Special treatment (refrigeration?)
(c) Who is to check inventory
(d) Normal resupply and control prior to closing
(e) Unsuitable, unusable or obsolete inventory

IV. Check Prior Performance Records

(a) What to be made available
(b) For what prior periods
(c) Unusual pricing arrangements
(d) Discounts
(e) Worker's Compensation claims
(f) Employee records and policy manuals
(g) Is (was) there a business plan?

V. Check Accounts Receivable -- Verification and Aging

(a) Who to collect accounts after closing
(b) Final list as of:
(c) Check payables if stock purchases
(d) Who is to determine if bad accounts

VI. Coordinate Furniture, Fixtures and Equipment

(a) All to buyer
(b) If not, what is seller to keep
(c) Value to be shown on separate list
(d) Computers and related files and records

VII. Review Warranties on Equipment

(a) Which equipment
(b) Types of warranties
(c) If no warranties and one important machine, consider cash escrow for performance.

VIII. Consider Covenant Not to Compete

(a) Who is prohibited from doing what
(b) For how long - time
(c) What area covered
(d) Consideration
(e) State law may limit enforceability
(f) IRC § 197 requires 15-year amortization (new tax consideration in 1993); See item XIX of outline.

IX. Review Leases

(a) Get copy -- check expiration date
(b) Assignments and subleases
(c) Renegotiation of lease possible
(d) Zoning allows intended use

X. Check Union Contracts and Commitments

(a) Pending union claims or violations
(b) Fringe benefits in excess of union contract
(c) Labor abuses (past)
(d) Overtime -- Department of Labor

XI. Review Qualified Retirement and Fringe Benefit Plans

(a) Copies furnished for all plans
(b) Should plan or benefit be assumed
(c) Cost to fund and maintain
(d) Approval letter received from agency
(e) Annual reports filed
(f) Performance of plan administrator

XII. Bulk Sales Law Compliance

(a) Seller or Buyer to comply
(b) Claims to be handled in advance or how

XIII. Review Pending or Expected Litigation

(a) What and how to handle
(b) Projected costs

XIV. Check Personal Warranties of Sellers

(a) On what and for how long
(b) Warranty provided by whom
(c) Security for performance
(d) Cash escrow to be established
(e) Two signatures on an escrow-type bank account with arbitration provisions
(f) Continuance of representations (how long)

XV. Review Employment Agreements, Bonus Policies, and Deferred Salary Arrangements

(a) With whom
(b) For how long
(c) Deferred salary arrangements
(d) Transition problems

XVI. Review Conduct of Business Until Closing

(a) Operations as normal
(b) Discussions with employees, by whom
(c) Announcements and communications
(d) Trade accounts
(e) Customers
(f) Incurrence of new debt pending closing
(g) Accidents and insurance coverage kept in force

XVII. Insurance Policies

(a) Are policies available
(b) Can coverage be arranged
(c) Is existing coverage adequate

* * * * * Tax Considerations * * * * *

XVIII. Asset Allocations (IRC § 1060)

(a) Form 8594 to be filed by both buyer and seller
(b) Purchase price must be allocated among various classes of assets using "residual method"
(c) Consideration allocated to goodwill must be identified
(d) Buyer must indicate if seller gave covenant not to compete or buyer entered into employment or management agreement with seller and the maximum consideration therefore
(e) Allocation controls basis for both gain and depreciation
(f) Better to allocate values in purchase agreement and, within reason, allocate more to amortizable or depreciable assets.
(g) Subsequent, unilateral allocations likely to be challenged by IRS
(h) Land not depreciable or amortizable

XIX. Amortizable § 197 [IRC] Assets," Amortized Over 15 Years, Include:

(a) Goodwill
(b) Going concern value
(c) Work force in place
(d) Books, records, and operating systems
(e) Patents, copyrights, formulas, know-how
(f) Customer base
(g) Licenses and permits
(h) Covenants (promises) not to compete
(i) An exception -- Software amortizable over 36 months

XX. Recapture of Depreciation

(a) Will Seller be subject to Recapture
(b) Amount and effect on sale

XXI. Deductibility of Salary & Other Payments to Sellers

(a) Recharacterization of management, salary, or other payments (Covenant not to Compete) by IRS may result in additions to the non-deductible allocations to the purchase price
(b) Can the person or entity to perform services actually provide service or compete?
(c) Contingent Installment payments of Covenants
(d) Covenant payments not amortizable until incurred
(e) Imputed interest may be imposed

XXII. Representations and Warranties

(a) Representation - - Statement of Past or existing fact true at some point. (Example, there have been no tax audits, lawsuits, and the like.)
(b) Warranties - - Guarantee that a certain condition exists or will continue. (Example, Seller will maintain certain assets to pay unexpected claims.)

XXIII. Matters often Subject to Warranties and/or Representations

(a) Entity in "Good Standing" and qualified to do business
(b) Authority to sell and deliver assets or stock
(c) Financial information accurate
(d) Title to Assets valid
(e) Third Party Rights - - no unknown claims, commissions, or encumbrances
(f) Government Consents, if needed, obtainable.
(g) Hazardous Substances - - not present, conditions
(h) Litigation - - pending or likely
(i) Licenses and Permits - - liquor licenses, etc.
(j) Compliance with applicable laws
(k) Payment of Taxes
(l) Bulk Sales Act
(m) Employee Relations
(n) ERISA (Employment & Retirement Income Sec. Act)
(o) Personnel matters - - violations of employee protection laws
(p) Assumption of Contracts - - any? which ones?
(q) Brokerage and Finders fees
(r) U.S. persons - - special laws for Resident or Non-Resident Aliens
(s) Capitalization & Ownership of Stock and Assets
(t) Condition and list of assets accurate
(u) No conflict with existing Court or administrative orders
(v) No material omissions

XXIV. Indemnification, Escrows, and Set-Offs

(a) Indemnifying party agrees to defend claims and pay if claim cannot be settled. May want to specify who to handle claims and how settlement to be accomplished to avoid litigation
(b) Does Indemnifying Party have sufficient liquid assets if required to pay
(c) Escrow - - funds set aside to pay claims
(d) When and how will funds be disbursed and who to decide when
(e) Signatures required to release escrowed funds
(f) Set-Off - - reduction in payments because a condition exists (equipment fails), seller does not provide promised assistance, or unexpected claim arises
(g) If set-off allowed, future installment payments are reduced accordingly

XXV. Legal Opinions

(a) Seller or Buyer's attorney(s) may be asked to provide legal opinion as to seller or buyer
(b) Affords some additional due diligence on part of Seller or Buyer's attorney
(c) Legal opinion needed if prior or pending significant litigation or administrative law problems (i.e. pending tax audit)

XXVI. Major Liability Areas

(a) Product Liability - - if stock purchased, claims for prior product liability continues
(b) Environmental liability - - an emerging area. Watch for CERCLA (Comprehensive Environmental Response, Compensation & Liability Act). Here the Government has incredibly broad powers
(c) Unpaid Taxes - - Seller should not assume

(1) Escrow funds for payment
(2) Order IRS transcripts for record of payments

(d) Bulk Sales Act - - Designed to protect creditors of Seller

(1) List of Creditors
(2) Schedule of Property to be purchased
(3) Preserve records for six months
(4) Notify creditors as to who to pay what, often notice done jointly

(e) Accounts Payable - - if a stock sale

XXVII. Sellers Financing

(a) What is to happen if there is a default in Buyer payments
(b) Rights of inspection during payment period
(c) Collateral for Seller Financing

(1) Real estate of Buyer
(2) Accounts receivable
(3) Inventory or equipment
(4) Personal guarantees
(5) Covenant that Buyer will not compete with defaulted business

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