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Understanding Price Allocation for Business Sales

Last updated on September 21, 2011 by Sozo Staff Leave a Comment

For those considering buying or selling a business, price allocation is probably one of the most important concepts to understand. Unfortunately, this process, which involves affixing prices to the business’s assets, is one of the most complicated and sometimes contentious parts of the business sale. Buyers and sellers will often find themselves at odds when it comes to allocating prices, but it is important for both parties to realize the need to compromise. Otherwise, the business deal could die on the negotiating table.

The unfortunate fact about price allocation is that buyers and sellers will likely have very different priorities. This conflict of interest exists as a result of taxes. The values assigned to tangible assets (those assets that are physically present, such as cash, property, and equipment) and intangible assets (those assets that are non-physical but still affect the business’s value, such as customer base) have a large impact on taxes because they are both taxed differently. Sellers will want to assign most of their values to intangible assets in order to reduce their after-sale taxes, but buyers, on the other hand, will want the highest values assigned to tangible assets. This results in the buyer incurring higher capital losses, which, although seemingly a disadvantage, actually allows them to take advantage of valuable tax-writeoffs.

Without the help of a professional third party, buyers and sellers could let their conflicting interests ruin a potentially mutually beneficial sale. However, with the help of a business broker like the professional transportation brokers at the Tenney Group, your negotiation process can be smooth, and your sale can be rewarding.

Filed Under: Business

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