You finally agree on a purchase price. Everyone shakes hands, or at least signs a letter of intent. Then the accountants ask how that price gets allocated across the assets being sold, and a second negotiation starts that a lot of business owners never see coming.
Purchase price allocation is not a formality. It changes how much tax you pay on the sale and how much benefit the buyer gets afterward. I want my clients thinking about this well before closing, not the week after.
1. Why allocation matters at all
In an asset sale, the total price gets divided among categories like equipment, inventory, real property, goodwill, and covenants not to compete. Each category is taxed differently on the seller's side and depreciated or amortized differently on the buyer's side.
The IRS requires both parties to use the same allocation, reported on matching forms. That is exactly why it becomes a negotiation. What helps the buyer often costs the seller, and vice versa.
2. The seller usually wants more allocated to goodwill
Goodwill is generally taxed to the seller at capital gains rates rather than ordinary income rates. Sellers want as much of the price as possible characterized as goodwill for that reason.
A seller also usually wants to minimize allocation to depreciable equipment where prior depreciation has to be recaptured and taxed as ordinary income.
3. The buyer usually wants more allocated to depreciable assets
Buyers want value assigned to equipment and other tangible assets with shorter useful lives, because that generates faster depreciation deductions after closing. Goodwill and other intangibles are typically amortized over a much longer period, so buyers get less benefit from that category, and more slowly.
This is the core tension. The seller's best tax outcome and the buyer's best tax outcome are pulling the allocation in opposite directions.
4. Covenants not to compete deserve their own conversation
Money allocated to a covenant not to compete is taxed to the seller as ordinary income and amortized by the buyer over time. It rarely helps the seller and often gets requested anyway, sometimes bundled into a broader personal goodwill argument.
Whether personal goodwill attributable to the seller individually, as opposed to the business itself, can be separately allocated is a real question worth raising with your advisors given your specific facts.
5. Get it in the purchase agreement, not left for later
I like to see the allocation schedule negotiated and attached to the purchase agreement itself, not left as an afterthought to be worked out after closing when leverage has shifted. Once the deal closes, the buyer has much less incentive to accommodate the seller's preferences.
Both sides are legally required to file consistent allocation forms with their tax returns. Mismatched filings are a known audit trigger, so getting agreement in writing protects both parties, not just you.
Purchase price allocation is where a lot of the real economics of a deal get decided, quietly, after everyone thinks the hard part is over. If you are negotiating a business sale and want the allocation addressed properly, reach out through blgattorney.com or call my Oklahoma City office before the letter of intent is final.