The buyer is offering an asset sale structure but wants to allocate ninety percent of the purchase price to personal property and goodwill, which triggers high ordinary income tax for us. How do we structure a purchase price allocation agreement that balances their tax write-off benefits with our capital gains goals?

Question

Tyler Smith · Accepted Answer

In an asset purchase, the buyer and seller must agree on how to allocate the purchase price across different asset classes according to tax guidelines. This allocation determines how much of your gain is taxed at lower long-term capital gains rates versus higher ordinary income rates. Buyers naturally push for allocations that favor their future tax deductions, which can cost you millions.

To find a balance, you must use the valuation data from your Step by Step Exit Business Integrity Review to establish realistic, defensible boundaries for each asset category. Do not let the buyer arbitrarily assign values. Instead, demand a formal valuation of your intangible assets, such as proprietary software, trade names, and customer lists.

If the buyer insists on an allocation that increases your tax burden, you must negotiate a purchase price gross-up. This means the buyer increases the total purchase price to offset your incremental tax liability. Make it clear that your target net proceeds are non-negotiable.

By approaching the allocation with clear data and a firm stance on your net cash proceeds, you can force a structure that protects your wealth while still allowing the buyer to get their necessary tax step-up on legitimate assets.