During deep diligence after signing the LOI, the buyer discovered some historical sales tax compliance issues. How do we prevent them from using this to chip our valuation multiple?

Question

Tyler Smith · Accepted Answer

Discovering a compliance gap during the exclusive diligence window after signing the Letter of Intent is a classic opportunity for a buyer to recontract and chip your valuation. If the buyer uncovers an unaddressed sales tax exposure, their immediate reaction will be to demand a permanent reduction in the purchase price or a massive escrow holdback.

To prevent this, you must control the narrative by separating a one-time historical liability from the ongoing run-rate earnings of the business. Do not let them apply a multiple to this risk. Instead, isolate the issue and address it quantitatively. You can negotiate a specific indemnity or a dedicated escrow account that is strictly capped at the maximum potential tax exposure plus penalties, rather than allowing a general purchase price reduction.

This keeps your valuation multiple intact because the operational earnings of the business are not affected by a past compliance oversight. At the same time, you must demonstrate to the buyer that you have resolved the issue going forward. Show them that you have updated your financial processes and assigned clear accountability for tax compliance to a specific seat on your Accountability Chart.

By presenting a clear remediation plan and isolating the historical risk into a bounded escrow, you show the buyer that the issue is operational history, not an ongoing threat to future cash flows. This professional approach protects your headline valuation and keeps the deal moving forward toward a clean close.