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Sale/Purchase Price - Allocation Matters

             January 22, 2015
              Contributed to by:  Richard Zimmerman, Esq. 

This may be the year you decide to sell.  This may be the year you find the right buyer (or a buyer).  It's been a steep market recently, many practices changing hands for substantially less value than years past.  There are many considerations taken into account when considering whether the "right" deal has been presented, and of course as the Seller, none secondary (in the Seller's mind; we may have other arguments) than the purchase price. 

What you may not have considered, is that the purchase price is more than just a number. Beyond the dollar amount being negotiated, one of the most important aspects of the purchase price is the allocation thereof – that is, what percentage of the purchase price to be attributed to what assets of the sale. Though the allocation will not affect the amount of money changing hands between the buyer and seller, it can have serious implications on the tax responsibilities of both parties.

Generally speaking, sellers prefer to allocate as much value as possible towards assets that are taxed at the lowest rates. This usually means intangible assets, such as compensation for goodwill or for a restrictive covenant, the sale of which are (currently) taxed at a maximum of 20%. Contrast that with the sale of tangible assets – e.g. equipment, office supplies, etc. – which can be taxed up to 39.6%.

On the other hand, buyers favor an allocation that allows for the fastest depreciation reductions for the assets being transferred. A buyer will want to allocate as much of the purchase price as possible to tangible assets, which can be depreciated much more quickly than something like “goodwill.” This creates a conflict between the buyer and seller, whose interests are diametrically opposed when it comes to allocating the price to minimize their respective tax responsibilities. 

Allocation is just one in a long list of considerations to keep in mind when buying or selling a practice, but it’s one that buyers and sellers should decide upon in tandem with the purchase price when negotiating a sale.

To discuss your practice circumstances, whether now is the right time to buy or sell for you, contact Jennifer at 516 747 6700 x. 302, Jennifer@Kirschenbaumesq.com or Erica at 516 747 6700 x. 308, EYoungerman@Kirschenbaumesq.com.  Listserv Members are never charged for consultations!  Looking for a referral to a practice broker?  Let us know. 
 
 


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