Comments on: Losing $75K in 7 Seconds: Purchase Price Allocation 101 http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/ Merger and acquisition, management buyout, capital raising and strategic advisory services to small and middle market companies. Sat, 22 Nov 2008 00:27:54 +0000 http://wordpress.org/?v=2.3.1 By: Bipin http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-132 Bipin Wed, 05 Mar 2008 22:31:53 +0000 http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-132 Does anyone know if there is a test as to what a fair allocation for a non-competion agreement would be? I am buying a business and the seller's lawyer wants to put $3,000 into a five year non-compete. The purchase price for the business is $1 million, and I was thinking that at least $50,000 or $75,000 should go to non-compete. Does the IRS scrutinize this? I don't want to make it so small that it doesn't make sense. Does anyone know if there is a test as to what a fair allocation for a non-competion agreement would be? I am buying a business and the seller’s lawyer wants to put $3,000 into a five year non-compete. The purchase price for the business is $1 million, and I was thinking that at least $50,000 or $75,000 should go to non-compete. Does the IRS scrutinize this? I don’t want to make it so small that it doesn’t make sense.

]]> By: Dale Karney http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-119 Dale Karney Sun, 02 Mar 2008 18:38:28 +0000 http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-119 I agree with Imrul to the extent that a buyer shouldn't necessarily be concerned whether a portion of purchase price is allocated to goodwill versus non-compete. However, I don't believe that was the point of the article. My reading of this article is that if the buyer understood how the allocation worked, there may have been an opportunity for him to use that to his advantage. He could have allocated more to goodwill and perhaps paid less for the business in total purchase price (a negotiation) or did what you suggested and allocated away from non-compete and into consulting agreement thereby taking a real-time deduction. I agree with Imrul to the extent that a buyer shouldn’t necessarily be concerned whether a portion of purchase price is allocated to goodwill versus non-compete. However, I don’t believe that was the point of the article. My reading of this article is that if the buyer understood how the allocation worked, there may have been an opportunity for him to use that to his advantage. He could have allocated more to goodwill and perhaps paid less for the business in total purchase price (a negotiation) or did what you suggested and allocated away from non-compete and into consulting agreement thereby taking a real-time deduction.

]]> By: Imrul Huda http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-102 Imrul Huda Wed, 27 Feb 2008 21:47:25 +0000 http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-102 I think this article was misleading. The buyer, which is Kevin, is always indifferent with allocation of purchase price between non-compete or goodwiill, primarily because under IRC section 197, both non-compete and goodwill are amortizable for 15 years. The seller, on the other hand, is affected because non-competes are treated as ordinary income (taxed at 40%), whereas goodwill is taxed at capital gains (15%). Seller has the incentive to allocate as much as he can on goodwill. So your client, Kevin (buyer), really didn't lose any money for allocating more into non-compete. However, if he could reallocate some of the non-compete into consulting, maybe then he could save some money since consulting agreements are treated as current deductibles. I think this article was misleading. The buyer, which is Kevin, is always indifferent with allocation of purchase price between non-compete or goodwiill, primarily because under IRC section 197, both non-compete and goodwill are amortizable for 15 years. The seller, on the other hand, is affected because non-competes are treated as ordinary income (taxed at 40%), whereas goodwill is taxed at capital gains (15%). Seller has the incentive to allocate as much as he can on goodwill. So your client, Kevin (buyer), really didn’t lose any money for allocating more into non-compete. However, if he could reallocate some of the non-compete into consulting, maybe then he could save some money since consulting agreements are treated as current deductibles.

]]> By: John http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-12 John Fri, 18 Jan 2008 03:21:21 +0000 http://www.potomaccompany.com/2007/11/19/losing-75k-in-7-seconds-purchase-price-allocation-101/#comment-12 I am looking for information on how to allocate the purchase price of an acquisition that i am making. The IRS does a horrible job of describing the process and my accountant is no better. Do you have any informaton on how to determine the tax ramifications of different allocations? I like your article, but it doesn't really give me the information that I need. Any help you can provide would be great. thanks, John I am looking for information on how to allocate the purchase price of an acquisition that i am making. The IRS does a horrible job of describing the process and my accountant is no better. Do you have any informaton on how to determine the tax ramifications of different allocations? I like your article, but it doesn’t really give me the information that I need. Any help you can provide would be great.

thanks,

John

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