Price Allocation for Business Sales

If you are in the process of selling your business or are considering doing so, then it’s important that you understand some of the basics of price allocation. Price allocation is the process by which businesses affix values to their assets, and, although seemingly straightforward, the process can be very complicated. First, understand that both tangible assets (fixed, physical items like vehicles, cash, and property) and intangible assets (non-physical things that still impact the value of a business, such as customer base and loyalty) are taken into account when allocating prices. The choices made when categorizing your assets as tangible and intangible can be a major determinant in the future stages of your business sale.

In fact, buyers and sellers often find themselves at odds at the negotiating table based on the choices made when assessing tangible and intangible assets because these two categories have an enormous impact on taxes. Basically, sellers have a large incentive to categorize most of their assets as intangible because it allows them to minimize their post-sale taxes. Buyers, on the other hand, are more inclined to allocate values to tangible assets in order to incur higher capital losses, thereby allowing them to take advantage of tax write-offs. This conflict of interest could lead to some intense arguments at the negotiation table, so it’s important for both buyers and sellers to be willing to compromise.

After the deal has been negotiated, buyers and sellers must ensure that their numbers match up. The IRS inspects price allocations very closely, and, if disparities exist between both parties’ figures, the IRS will have more than enough incentive to conduct an investigation, a stress that no business wants to endure. Because the price allocation process is so complicated, oftentimes the best solution is to seek the services of a professional third party. Attorneys, accountants, and specialty business brokers like the experienced transportation brokers at the Tenney Group are all excellent resources for buyers and sellers of businesses. Their expertise can help to make the sale process a rewarding one.