Price allocation is one of the most important factors in determining whether or not a business sale will be successful, but there’s much more to this process than simply affixing prices to various assets. Business owners must also consider, for example, how the differences in taxes for tangible and intangible assets will affect their potential buyers’ responses. Tangible assets (those assets which are fixed and physical, such as equipment, buildings, and cash) are taxed at a much higher rate than intangible assets (those assets that are non-physical but will still affect the value of a business, such as customer base), and a seller’s choices during allocation can have huge consequences.
Because of the tax differences, it makes the most sense for sellers to categorize most of their assets as intangible, as this reduces the amount of post-sale taxes that they’ll face. Contrarily, buyers benefit the most from tangible assets because the higher amount of capital losses they’ll incur during the sale allows them to take advantage of valuable tax write-offs. This conflict of interest could result in a dead deal if buyers and sellers aren’t careful to compromise and align their interests deliberately.
Also adding to the confusion of price allocation is the possibility of an IRS investigation. Buyers and sellers must communicate openly and honestly throughout the entire sale process, even after the deal has closed, to ensure that their numbers and figures coincide perfectly. Any disparities that exist in terms of each party’s price allocation figures could be grounds for an IRS investigation, a stress that no business should be forced to endure.
The complicated nature of price allocation means that in many cases, it’s best to seek the assistance of a trained professional. Attorneys and accountants are a great resource, and specialty business brokers like the professional transportation brokers at the Tenney Group can also be of assistance. These brokers are experts at navigating all stages of the sale process; from price allocations to negotiations, from initial paperwork to closing procedures, the Tenney Group will help to make your sale experience a rewarding one.