Purchase Price Allocation
How purchase price gets allocated across asset classes for tax purposes, and why the buyer and seller fight over it.
- Allocation methodology and amounts per class
- Form 8594 consistency requirement
- Personal goodwill treatment
- Non-compete value (avoid over-allocation)
If this clause already feels aggressive in isolation, upload the full contract and see how it combines with payment terms, liabilities, and exit rights.
Analyze My ContractWhat this clause actually does
Purchase price allocation (PPA) divides the purchase price across asset categories (inventory, equipment, customer lists, goodwill, non-compete) for tax purposes. Buyer and seller have opposing interests: buyer wants more allocated to depreciable or amortizable assets; seller wants more allocated to long-term capital gain assets like goodwill.
Why people get burned by this clause
On a $3M deal, shifting $500K from goodwill to equipment changes the buyer's depreciation deductions by $100K+ and the seller's tax bill by $100K+. The IRS Form 8594 must match between buyer and seller.
What should make you slow down
- Allocation set by seller without buyer review
- Excessive allocation to non-compete (creates ordinary income for seller)
- Equipment allocation exceeds fair market value
- Goodwill allocation does not include personal goodwill carve-out
- Form 8594 not addressed in agreement
Where you usually see it
- Asset purchase agreements
- Closing statements
- IRS Form 8594
What the platform checks in the live contract
- Allocation methodology and amounts per class
- Form 8594 consistency requirement
- Personal goodwill treatment
- Non-compete value (avoid over-allocation)
- True-up procedure for post-close adjustments
What stronger language usually looks like
- Allocation negotiated jointly with buyer's CPA input
- Form 8594 consistency required
- Personal goodwill identified separately
- Non-compete allocation under 5% of purchase price
Definitions worth opening next
Articles that go deeper
PPA is a real dollar fight that hides in the schedules. Loop in your tax advisor before signing the APA, not after.
See how this clause behaves in the real contract.
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