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Asset Allocation in Maryland Business Purchases

In a Maryland small business sale, the owner is selling a collection of assets, some tangible (such as inventory, vehicles, buildings, and FF&E) and some intangible (such as software, customer lists, trade names, trained & assembled workforce, patents, non-compete agreements, and goodwill). Unless the entity is a C-Corp and stock is being sold, the total transaction price is allocated sequentially based on the fair market value of the acquired assets.

The Tax Code shows that assets fall into 7 different categories (asset classes) based on IRC section 1060 (Form 8594), and requires that the buyer and seller adopt and maintain a consistent purchase price allocation method for tax future calculations that will determine both the buyer's basis in the assets and the seller's gain or loss. In most cases, the tax impact on the individual assets sold are measurably different for the buyer and seller and therefore the negotiation of the dollar amounts allocated to each of the 7 categories becomes an important element of the business transaction.

• Class I - Cash
• Class II - Marketable Securities
• Class III - Market to Market Assets & Accounts Receivable
• Class IV - Inventory
• Class V - Assets Not Otherwise Classified
• Class VI - Section 197 Intangibles other than Goodwill and Going Concern
• Class VII - Goodwill and Going Concern Value (Residual)

Minimizing taxes plays a major role in structuring and negotiating a business transaction. Many promising deals have fallen through because the buyer and seller couldn't agree on how to structure the deal to minimize taxes. Typically, the seller seeks to have as much money as possible allocated to assets that would be taxed as capital gains versus assets that would be treated as ordinary income.

The buyer on the other hand strives to have a larger weight allocated to assets that are currently deductible or where stepped-up assets could be depreciated quickly under IRS regulations. Particular attention should be paid to the identification and valuation of the "intangible" assets as they can be significant in negotiating terms.

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