Tax implications abound with the sale and purchase of a businesses’ assets regardless of the price, ongoing revenue prospects and whether it is large or small. The perfectly crafted purchase agreement I can prepare can be rendered an economic disaster for buyer and seller alike if it lacks one crucial element . . . a well negotiated purchase price allocation whose tax impact is carefully and well calculated.
The purchase price of a business is allocated to each specific category of assets sold by the seller to the buyer. For example, the $100 purchase is allocated in either equal or unequal portions to real estate, building, machinery, work in progress and other specific assets involved. In these cases, the pieces-parts all add up to the $100 total for both the buyer and the seller. The tax impact is totally different.
The desires of the seller and ambitions of the buyer are essentially exact opposites when allocating the purchase price of a business. Seller is selling assets depreciated for prior tax benefits. An excessive allocation of the purchase price allocated to those depreciated can result in unexpected a higher tax ultimately paid on the sale. These increased taxes can negate the expected economic benefits of a business sale.
The buyer wants as much of the purchase price as possible (no, the buyer wants all the purchase price) allocated to those same depreciable assets so he or she gets future tax benefits. Potential lower taxes in the future eases cash flow concerns and allows the ongoing business to financially benefit and further prosper.
My experience and knowledge can benefit you in your due diligence process in which crucial elements like purchase price allocation and others are investigated. Together we then negotiate and structure the sale and purchase transaction into an agreement that works. You get a transaction done rather than one that dies because of overlooking or underestimating the tax impact of the purchase price allocation.