FB pixel

Purchase Price Allocation in a Florida Business Sale

An allocation of the purchase price is an essential component to a business sale transaction. Both buyer and seller have to work together to get it done, but most people have never heard of it before. Here we will explain exactly what it is, why it’s necessary, and it’s our goal to prepare buyers and sellers to complete it when the time is right. 

What is an allocation of purchase price?

Buyer and Seller will agree on how the purchase price is divided up between the different assets of the business. For example, if a company is being sold/purchased for $1,000,000 the parties will need to specify what that $1,000,000 is paying for. Buyer and seller have agreed that there is real estate worth $300,000. The fittings, fixtures, and equipment (FF&E) is worth $500,000 and the goodwill of the business is worth $200,000. That breakdown will be noted on a form that will be submitted to the IRS by both buyer and seller individually for the tax year that the business was bought/sold. We are told by tax experts and attorneys alike that numbers for both buyer and seller need to match, or else it could trigger an IRS audit. The worksheet used to determine purchase price allocation and the process depends on the closing attorney used for the business sale transaction.


When does it happen?

It’s our opinion that it’s in the best interest of both buyer and seller to get the purchase price allocation done prior to closing. That way, all parties are literally on the same page, and then they can just submit it to their CPA come tax time. The other option is for the parties to elect to complete it after closing on their own. In our experience, this usually results in it not getting done until the last minute or the parties not having numbers that match up perfectly. Of course, with any tax matter, a professional accountant or CPA should be consulted. 


How does it get done?

If buyer and seller agreed in the contract to complete it before closing, as a courtesy, we will send a sample worksheet to buyer and seller and remind them that it needs to be done. Buyer and seller then need to work together, compromise, and reach a consensus with the numbers. Both parties are encouraged to consult their CPAs or accountants for advice on how to fill out the worksheet or specifically allocate the purchase price. 

In the standard Florida BBF Asset Purchase Contract, this is what both buyer and seller agree to, in terms of the allocation of purchase price:


33.1 Buyer and Seller acknowledge that certain Federal Income Tax laws may be applicable to this transaction. 

33.2 Buyer and Seller acknowledge that each party may be required to report this transaction to the Internal Revenue Service (IRS) and allocate the Purchase Price among the applicable asset classifications found on IRS Rev. Form 8594. 

33.3 Buyer and Seller agree to cooperate fully with each other to determine the appropriate asset allocation for this transaction. 

33.4 Buyer and Seller agree to complete, sign and submit the appropriate IRS Rev. form 8594 for this transaction. 

33.5 Buyer and Seller [__] agree to have the asset allocation completed at Closing, [__] do not agree to have the asset allocation completed at Closing.


What does the process look like?

The parties need to get advice from their CPAs on how to allocate the funds. Buyer and seller will have to compromise and agree on the numbers. As business brokers, we can’t tell the parties how to fill out the form or give advice, but we can help mediate if there is conflict regarding agreement on the numbers. The values for FF&E or inventory are normally in the advertised numbers for the business, so those numbers can be used from the marketing items provided, as long as they are accurate. Once the allocation of purchase price is completed, agreed numbers should go to the closing attorney (or follow their process), so they can include the allocation of purchase price with the closing documents. The numbers that were agreed to need to be sent to each party’s tax preparer, to include with their return for the year that the business was purchased or sold.