Sunday, October 21, 2007
Allocating the Purchase Price
If you are selling all or substantially all of the assets of your business, or if you are buying the assets of a business, you will certainly have to come up with a purchase price that both sides can agree upon. However, the negotiating with respect to the purchase price should not stop there. The parties should be making an agreed-upon determination of how that price is allocated amongst the various types of assets. For instance, what is being paid for the goodwill or client list of the business verses the depreciated assets verses the leasehold improvements? It can make quite a difference to both sides, in terms of the tax consequences, and often the buyer and seller have opposite preferences. So the actual price can be influenced by how that price is allocated. Buyers will be more likely to pay more up front, for instance, if they can write the assets off quickly afterwards. It is important for both the buyer and the seller to consult with their lawyers and accountants with repsect to the allocation and to ensure that it is agreed upon either up front, or at the very least, prior to closing. Understanding the tax and legal implications of your decision to buy or sell at a certain price makes good business sense.