The buyer is pushing for an asset sale and wants to allocate a massive portion of the purchase price to personal property and goodwill to maximize their tax depreciation. How do we negotiate a purchase price allocation that does not trigger a catastrophic tax bill for us?

Question

Tyler Smith · Accepted Answer

In an asset sale, the purchase price must be allocated among the acquired assets for tax purposes. Buyers want to allocate as much as possible to tangible personal property and covenants not to compete, which allows them to write off those expenses quickly. For you, the seller, this allocation can trigger massive depreciation recapture taxes, turning what seemed like a great deal into a financial disappointment.

To negotiate a favorable purchase price allocation, you must use your clean operational and financial records as leverage. Start by utilizing your detailed asset register and historical capital expenditure records. If your EOS® processes have kept your physical and digital asset valuations accurate and documented, you can prevent the buyer from arbitrarily inflating the value of depreciable equipment.

We recommend establishing your target allocation range before you sign the letter of intent. Work with your tax advisor to calculate the tax impact of different allocation scenarios. If the buyer insists on a structure that maximizes their tax benefits at your expense, you must demand a tax gross-up payment to offset your increased liability.

By proving the exact value of your intellectual property, proprietary software, and goodwill, you can defend against an unfair allocation. Do not leave these details to the final drafting phase of the purchase agreement. Bring your operational data to the table early and make the purchase price allocation a key deal point.