Asset Allocations

Often a key issue in a sales transaction is the allocation of the sales price to various types of assets. The IRS has specific guidelines regarding these allegations, but accounting firms can help the buyer and seller both come to a fair asset allocation for both parties. The IRS requires that both parties use the same asset allocation.

Generally speaking, the IRS requires each tangible asset be valued at its Fair Market Value (FMV). The total FMV of all assets in each class are added up and subtracted from the total price paid before moving on to the next asset class. 

These asset classes are (in order):

  1. Cash
  2. CDs, government securities, readily marketable securities and foreign currency
  3. All other assets, except intangible assets
  4. Intangible assets

The buyer typically wants to maximize the value of depreciable or amortizable assets, in order to maximize write-offs.  The seller typically wants to allocate as much as possible of the sale price to goodwill, which is taxes a capital gains rates.  So some negotiation as to the Asset Allocation is likely to be needed on most business sales.