The purchase price for a business is one of the most important concerns for both buyers and sellers, but often times, neither party has a comprehensive understanding of the factors that actually contribute to this figure. A business’s purchase price is determined by summing each of the business’s assets that is to be transferred during the sale, and the process of affixing a price to each of these assets, which can be quite complicated, is known as price allocation.
Price allocation for a business sale can affect a number of things, including taxes and the deal negotiation process, but luckily, there are some general basic facts to help you through the process. Below you will find the top three basic facts about business price allocation:
1. Tangible and intangible assets are priced differently.
Many business owners are unaware of the fact that intangible assets can even affect their price allocation process, but these can actually be a huge determinant. Whereas tangible assets tend to be physical, present items, such as cash, property, vehicles, equipment, and structures, intangible assets tend to be unseen and non-physical.
Examples of intangible assets include patents, customer goodwill, reputation, and other factors that do not hold a fixed value but still have a definite impact on the value of the business. When allocating prices, it is important to remember that intangible assets exist and do affect the total sale price.
2. These values affect tax liability.
Not only do tangible and intangible assets affect purchase price, but they also affect your taxes. Tangible assets are considered taxable income, and they can be taxed at a much higher rate (up to 35 percent) than your intangible assets, which can only be taxed at a rate of up to 15 percent. This disparity has a major impact on the individual incentives of buyers and sellers.
Whereas the business’s seller will be inclined to apply most of their price to intangible categories in order to minimize post-sale taxes, the buyer will have ample motivation to allocate more of the price to tangible assets, such as equipment that will depreciate in order to incur higher capital losses and therefore take advantage of tax write-off incentives.
This potential conflict of interest can have a major impact on the negotiation of a business sale, so it’s often necessary to engage professional third parties in the allocation process in order to ensure that a fair outcome is reached. Otherwise, a mutually beneficial deal could die on the table.
3. The IRS looks at these allocations closely.
Contrary to what many people believe, the IRS will inspect price allocations for a business sale very closely. The buyer and seller of a business must therefore ensure that their numbers are consistent between both parties’ documents because apparent disagreements in price allocation is an enormous incentive for the IRS to investigate for possible tax fraud. Business brokers, transaction attorneys, accountants, and other experienced professionals are therefore tremendously useful resources for both buyer and seller during the sale of a business.
While these tips are certainly useful, hiring an expert to help with price allocation is generally the smartest and easiest course of action. A specialty business broker like the Tenney Group can not only help you with this step of the sale process, but can help you through negotiations and the deal’s closing as well. If you are planning on buying or selling a transportation business, then contact the Tenney Group today. Their expertise and proven sales record will help you through every step of the buying and selling process. For more information and to get insider tips, visit them online at thetenneygroup.com today.