Asset Purchase - Purchase Price Allocation (any tips?)

June 03, 2019

by a searcher from Harvard University - Harvard Business School in San Francisco, CA, USA

Any advice on what would be most advantageous allocation of purchase price to the buyer in an asset purchase? I'm primarily concerned about tax treatment, but if there are other considerations that should be on my radar, I'd love to hear. The business I'm looking at is a manufacturing business, with equipment, vehicles, and inventory. Thanks in advance.

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Reply by a searcher
from Harvard University in 1970 Walton Dr, Burlington, WA 98233, USA

I second what Robert said. You'll have to file a form 8594 on your first tax return, and they will file it as well for their final tax return. As I understand it the forms must match. If you have a purchase price allocation (PPA) in the purchase agreement, make sure that you retain the responsibility of preparing the Form 8594 and that you can reasonably adjust it.
You can build a model that shows the seller's pro forma tax benefit from a PPA that has a lower amount of physical property, versus your pro forma benefit from a higher basis in real property versus goodwill. In my case, I was able to negotiate a reduction in consulting fees by agreeing to a PPA breakout that was advantageous to the seller - we both came out ahead.
Unless the seller is fairly sophisticated, you will likely find that net working capital stated at close will need meaningful adjustments to capture labor in inventory, accrued commissions and discounts, etc.
I'm happy to discuss in more detail.

Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

Purchase price allocation for GAAP and tax can be different. What a Seller is willing to agree to can also vary based on how it impacts their after tax proceeds. When I represent Buyers I never want to include a purchase price allocation in the purchase agreement if I can avoid it. This gives the Buyer flexibility post-close to allocate the purchase price favorably based on how they report for their books and records or for financial statement purposes, which if audited require a valuation or other evidence to support the value used. When I represent Sellers, I always want to agree to a purchase price allocation in order to limit the Sellers ordinary income and increase their after tax proceeds. There can be other factors that go into purchase price allocation based on the type of entity the Seller is and the terms of the transaction you have negotiated. Glad to set up a call to discuss in more detail.

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