Allocation of Business Purchase Price
Allocating the purchase price (total sale price) of a business amongst the various asset components (asset "classes") of a business is usually necessary when a business is sold, whether it is via a stock sale or a non-stock sale.
In the sale of a business, we are usually selling an ongoing concern, thus we are usually dealing with one of the following.
- The sale of the stock of a corporation
- The sale of the tangible and intangible assets of a corporation, or another business entity, e.g., a sole proprietorship, a partnership, an LLC or LLP
With respect to Allocation of Purchase Price for a non-public corporation, the first consideration is usually whether the sale is to be a stock sale or a non-stock sale. A non- stock sale is frequently referred to as an "asset sale." Unfortunately, there are at least two commonly used definitions of an "asset sale":
- The sale of most, or all, of the tangible and intangible assets of an ongoing Business concern
- The sale of some, or all, of the fixed assets (only) of a business, which is also referred to as the "liquidation" of assets. In this scenario, oftentimes the business is closed, or about to close.
Allocating the purchase price to specific assets in a business acquisition is part science and part art. The science comes into play with regard to following the rules that the Internal Revenue Service has established, as well as documenting the assumptions and support that were used. The art comes into play with regard to allocating value to the intangible assets that are present in most ongoing businesses. Key points being:
- Internal Revenue Code (IRC) 1060 and Reporting Requirements (Form 8594)
- Dealing with hard ("tangible") assets
- Dealing with intangible assets
- The real world (purchase price negotiated first, then the pieces are given values)
It is important that both the seller's and the buyer's tax advisors are consulted when the allocation is being negotiated. Frequently, the Allocation of Purchase Price can become another area of negotiation after the price, terms and conditions of the sale have been agreed to by the buyer and seller. Since the typical tax impacts are "whatever is good for the seller is bad for the buyer, and vice versa," occasionally the Allocation of Purchase Price negotiations can be as critical as the purchase price negotiations.
In both Stock Sales and Non-Stock Sales, the sale usually includes all the assets of the business including, but not limited to all equipment, trade fixtures, leaseholds, leasehold improvements, contract rights, business records (with seller retaining a reasonable right of inspection), licenses, franchises, customer list, goodwill, covenant not to compete, trade secrets, trade names, telephone numbers, suppliers, work in progress ("WIP"), saleable and consumable inventories, plus training on managing the business from the principals / seller. A non-stock sale frequently does not include accounts receivable, bank accounts, deposits, cash, or most business liabilities.Section 1: Allocation of Purchase Price
Section 2: Stock Sale - Allocation of Purchase Price
Section 3: Non-Stock Sale - Allocation of Purchase Price
Section 4: Tax Implications - General Guidelines
Section 5: Key Points - Allocation of Purchase Price