Purchase Price Allocation
How the total price is divided among asset classes — and why both parties care.
01
What It Means
In an asset sale, the purchase price is divided among categories such as inventory, equipment, furniture and fixtures, leasehold improvements, real property, non-compete covenants, and goodwill. That division is the purchase price allocation.
Buyer and seller generally must report the allocation consistently, and it is documented as part of the purchase agreement and the parties' tax filings.
02
Why It Matters
Allocation determines the buyer's future depreciation and amortization deductions, which affects after-tax cash flow for years.
It determines the character of the seller's gain, which can change the seller's tax outcome substantially at the same headline price.
It also affects financing and real estate. Lenders underwrite differently against equipment, real property, and intangible value, and the real estate figure carries appraisal and property tax implications.
03
Common Misconceptions
- "Allocation is a formality handled at tax time." It is a negotiated business term that belongs in the contract.
- "Buyer and seller can report different allocations." Consistent reporting is generally required.
- "Only the total price matters to the seller." Two identical prices can produce very different after-tax proceeds.
- "Real estate value can be assigned freely." It should be supportable, and it has appraisal and assessment consequences.
04
Questions to Ask
- What allocation is proposed for each asset category, and why?
- How does the allocation affect my after-tax result?
- What depreciation or amortization schedule results for the buyer?
- How is real property valued within the allocation?
- Have my CPA and attorney reviewed the allocation before signing?
05
Related Reading & Resources
The most successful real estate decisions often involve collaboration between several professionals working toward the same goal. Understanding each person's role helps you ask better questions and make more confident decisions.
06
Other Business Sale Terms
- Asset SaleThe buyer purchases specific business assets rather than the legal entity that owns them.
- Stock SaleThe buyer purchases the ownership interest in the entity, and the business continues intact.
- GoodwillThe intangible value of a business beyond its tangible assets — reputation, customers, and earning capacity.
- EBITDAEarnings before interest, taxes, depreciation, and amortization — a common starting point for valuing a business.
- Seller FinancingThe seller carries part of the purchase price as a note, and the buyer repays over time.
- Non-Compete AgreementA negotiated limit on the seller competing against the business they just sold.
Thinking About Buying or Selling a Business?
Whether your transaction involves commercial real estate, business assets, or both, I'd be happy to discuss your goals, help you understand the process, and determine what resources or specialized expertise may be appropriate for your situation.
Schedule a Consultation