There are a handful of key asset categories in allocating or breaking down the purchase price of a business during the sale process. In many instances buyers and sellers have different desires in how to "chop up" the purchase price. The allocation in required to complete the transaction. Below are the most common used asset allocation classes.
In my opinion the actual asset value of each category is not so important here. For instance, many times buyers and seller try to really figure out what the Fixtures and Equipment are really worth and plug that real value into the allocation. Don't lose sight on the bigger, more important picture here. What is most important about the allocation is the tax ramifications involved not actual values. For a buyer you are setting up you initial book values in these categories for future depreciation purposes. For a seller (who is selling for a gain) they may have different tax rates; ordinary income vs. capital gains.
This is no place to lose a deal over, but if planed well it should be most beneficial tax wise for you. I always tell my buyer and seller to consult their CPA over this issue, but I also want to stay in the loop on this one so the sale doesn't get away from me. If both sides understand the ramifications to each other properly, they always come to agreement. Be involved in this stag. It is important.
Fixtures and Equipment: This asset class has the most to discuss. There is generally a 7 year life to depreciate the assigned value over. There are some equipment classifications that still depreciate over 5 years, but in general for a sale purpose it will be a 7 year life. This means that if I allocate $35,000 of the total purchase price towards Fixtures and Equipment I can write off this amount against my taxable income over the 7 year period. If your Accountant uses straight line depreciation (equal amount each year) it would equate to a $5,000 write off each of the 7 years. This is the shortest life of all classifications in the allocation which means the fastest write off.
Because of that, as a buyer your Accountant usually will tell you to allocate a large amount on this one. Keep in mind that as a buyer you will pay a 1 time sales tax on this amount prior to closing escrow. The amount of sales tax will be according to the tax rate per the county the business is located in. Most Counties are running Sales Tax rate of 8.75 -- 9.25%. Take your County rate multiplied by the value allocated to get your sales tax due. No other asset class requires tax paid upon purchase.
Accountants like a large amount here for depreciation, Buyers like a small amount here because of the sales tax due on the amount. Our wonderful taxing agency, The State Board of Equalization has a minimum formula they like to use. They want to see the value to be a minimum of the Sellers current Depreciated Book Value. This can be found on the Sellers federal tax return under pages titled "Federal Depreciation Schedule". In many cases the State Board of Equalization will ask the Seller for a copy of his Depreciation Schedule in order to close out the Sellers account and issue the Buyer a Buyers Tax Release.
Leasehold Improvements: Leasehold Improvements have a life from 29.5 to 39 years. You will get both of these numbers from various accountants. Personally if I use a Leasehold Improvement in my allocation I would want to use the 29.5 year life as the longer the life the less per year depreciation write off you will obtain.
This is the longest life of the asset classes.
Covenant Not To Compete: A Covenant Not To Compete has a 15 year life. In the past this used to get depreciated over the length of the Covenant. In other words a 5 year 5 mile Covenant Not To Compete used to get written off in 5 years. That made sense but the tax code changed this regardless of the actual Covenant life to where all Covenants are depreciated over a 15 year life.
Goodwill: Goodwill also has a 15 year life.
Liquor License: If your business has a Liquor License (full liquor) you should allocate some value to it, but it is a NON Depreciable item. Therefore I don't like to add the full or real value here, but like to allocate something here so that I don't get questioned by any taxing agency on my overall allocation.
I like to use the fastest depreciation allowed. I will generally only use Fixtures and Equipment, Goodwill and Covenant Not To Compete. I don't see any value in allocating anything to Leasehold Improvements. It is such a long life, and you don't get much "bang for you buck" on it.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Lee Petsas, Business Broker - Southern California Area
Lee Petsas has been selling businesses with UBI Business Brokers in Southern CA since 1981. In 1999 he became the Owner and Broker for UBI. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations.
|Mike Nova, Business Broker: North Bay Restaurant, Retail Specialist
I have over 30 years of direct restaurant industry experience, including my personal experience as a restaurant owner. For the last 7 years I have worked as a Broker specializing in this challenging and ever changing field of restaurant and bar sales. Contact me at 510-708-6682 Cell.
|Rob Hartman: Business Broker, SF Bay Area
Business brokerage services in the SF Bay Area. I bring skill, integrity and energy to all of my clients & our projects. I'm accustomed to working with a wide variety of clients and their businesses; large or small, simple or highly complex. Free consult. Contact me at 650-279-3097 Cell/Text.
|Chris Seaman, Business Broker: Southern California
Founded in 1994, First Choice Business Brokers has accelerated to become one of the most successful Business Sales Organizations in the world. Our team of agents have gone through extensive training to become experts in the field of business brokerage. Call Chris at 858-578-4111 for more info.
|Peter Siegel, MBA, BizBen Founder, ProBuy, ProSell Programs
Founder & President Of BizBen.com (since 1994) & BizBenNetwork.com. I am the Lead Facilitator for the ProSell & ProBuy Programs on both websites. I consult daily with buyers, sellers, and intermediaries daily about buying and selling businesses. Call 925-785-3118.
|Prabhjot Randhawa, Broker: SF Bay Area, Central Valley
I'm a Business Advisor at Liberty Business Advisors of San Francisco. I have over 20 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 10 businesses. 209-815-3842 Cell.
|Jim Saxton, Liquor License Broker & Consultant - SF Bay Area
20 years experience of local governmental requirements, such as Police Departments, Zoning / Planning Departments, and ABC District Offices, my company Liquor Licenses of SF Bay Area is very qualified to resolve all of your concerns during the liquor license transfer process. Call 925-787-0770.
|Ralph Santos, Business Broker: Health Care Specialist
Using my MBA and my perseverance I will make things happen! I provide business brokerage niche services specializing in the hospice and home health care agency industry in the Los Angeles County or Ventura County areas. For either buying or selling assistance please phone or email me today.
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