Sale of my client's business

[Strongsilence-CPA]

My client will be selling her business and has found a buyer she trusts. I have not talked with her yet about possible cash flow and liquidity issues I see on the buyer's 2022 tax return. 1. Large business losses in 2017 and 2018. 2. Mortgage loan from a family trust might indicate difficulty in getting a bank loan. 3. Early IRA distribution in 2022.  4. Loan by the buyer to buyer's S Corp of 60K in order to take the loss. 5. Sale of home in 2022 might have been for cash needed. I need to investigate this.

I don't have experience representing a seller. In addition to expressing my concerns about the buyer's liquidity to my client, where do I go from here? 

The guide I have from Ed Mendlowitz, CPA in NJ is instruction. What is the best form of assurance needed to show the buyer can afford the sale?  He also suggests getting a letter of interest from the buyer laying out the financial term proposed by the buyer.

[sjrcpa]

It is perfectly reasonable to ask the buyer how they will pay for the purchase.

[BobKamman]

What's left unsaid is whether your client is walking away with 100% of the purchase price, or carrying paper and what's the collateral.  I tell clients not to expect anything beyond the down payment; even buyers with the best intentions, know a good bankruptcy lawyer.  

I am helping some young friends in Ukraine who want to start a very small business.  This weekend I emailed them what I tell everyone here:  80% of small businesses fail, unless they are restaurants, in which case 90% fail, unless they have a liquor license, so that only 70% fail.  

[Strongsilence-CPA]

Good point Bob. Last week the buyer met with us and asked me about possible tax benefits of seller financing of the purchase. I said I didn't think there were any tax benefits for the buyer. But the question caused me to wonder about his ability to pay.

[TaxGuyBill]

What exactly is being sold?  Physical assets?  Client list?  Other intangible assets?  Stock or other ownership in a continuing entity?

[Strongsilence-CPA]

This is an athletic club with annual memberships. It is a California SMLLC taxed as a sole proprietorship. The sale is mainly tangible assets. 

I suppose the membership list is an intangible, but it seems to me that a sale of it would generate ordinary income. So I think advising her to list only equipment on the Form 8594 is the best advice.

Also, there is a building rental agreement which can be transferred. I don't know if or how this is relevant.

Notes:

When business assets are sold, the seller typically wants to allocate the proceeds to capital assets to generate capital gain, which is taxed at far lower rates than ordinary income. However, the buyer normally wants to allocate basis to depreciable assets with short recovery periods. The applicable asset acquisition rules allocate the consideration paid for a trade or business so that the buyer and the seller characterize gain, loss and basis consistently.

@TaxGuyBill 

[Strongsilence-CPA]

The buyer is not asking for a noncompete agreement.

Accounts Receivable is very small and is not an asset on the table. 

[sjrcpa]

I don't think you can/should ignore the membership list. That's how the business gets its revenue.

[sjrcpa]

The lease is an intangible asset and has some value.