The allocation of the purchase price in a business acquisition structured as an asset purchase can have significant tax impacts on the purchaser and the seller. The seller wants an allocation that results in no tax or capital gains tax rates, as opposed to ordinary income tax rates. The purchaser wants an allocation that allows the purchaser to deduct the purchase price over the fastest period of time. These conflicting interests often lead to compromises in the allocation. One way to strike a compromise is to allocate a portion of the purchase price to personal goodwill, as opposed to company goodwill. Personal goodwill is the goodwill of the individual owner of the seller that results from the person’s unique expertise, reputation or relationship with vendors and/or customers. The benefit to the seller is that personal goodwill is subject to capital gains tax rates. The purchaser can deduct amounts attributed to personal goodwill over fifteen years. Personal goodwill, as opposed to company goodwill, does not exist in every business. Before agreeing to an allocation to personal goodwill, an analysis should be made to determine the likelihood that the allocation will withstand any challenge by the Internal Revenue Service.
If you have any questions about this or any other M&A issue,
please contact Glenn Solomon at firstname.lastname@example.org or 443-738-1522.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
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