Business Purchase Price Allocation

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Business purchase price allocation is necessary following the purchase or sale of a business. The purchaser needs to allocate the total purchase price to establish their books for the purpose of calculating amortization and depreciation.

The seller needs to allocate the price to calculate their taxable income and taxes. Assets can include business enterprise value, real estate, business personal property, inventory and intangible personal property (trademarks, contracts, etc.).

Businesspeople handling the acquisition and sale typically negotiate one business purchase price for all related assets. It is possible for the businesspeople to also allocate the business purchase price between the various components. Business purchase price allocation is simpler for both the buyer and seller when it is allocated as part of the sales agreement.

However, the interest of the buyer and seller are disparate. The buyer typically prefers to allocate as much basis to personal property and other short-life property as possible. Conversely, the seller typically prefers to minimize the portion allocated to personal property to avoid recapture and income taxable at the ordinary income rates.

Some judgment is required for valuing each of the asset classes; substantial judgment is required for developing an appropriate opinion of value for esoteric assets such as trademarks and contracts. Inventory and real estate are probably the most straightforward assets to value. However, real estate contains both long-life items and short-life items.

Business personal property is more difficult to value due to the limited quantity of sales data and the differing quality and quantity of assets included in sales of business personal property. The unique nature of intangible personal property such as trademarks and contracts makes their valuation challenging and subjective. There is typically limited available data for guidance in valuing these types of assets.

After valuing each class of assets, the total value of all asset classes combined is compared to the business purchase price. The appraiser then makes adjustments as appropriate after further review and analysis to reasonably and accurately allocate the business purchase price.

It is possible for the buyer and seller to allocate the purchase price to the asset class components during contract negotiations. However, in most cases both the buyer and seller will benefit by independently allocating the business purchase price.

The appraisal division of O'Connor & Associates is a national provider of commercial real estate appraisal services including cost segregation studies, real estate consulting, due diligence, insurance valuations, feasibility studies, feasibility studies, financial modeling, gift tax valuations, highest and best use analyses, casualty loss valuations and HUD map market studies.

Patrick C. O'Connor has been president of O'Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction. For more information please www.poconnor.com today!

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