Allocation of Purchase Price in Asset Sale | 3-Step Process & Tips

Buying or selling a business can be overwhelming. The list of things to do seems endless. 

Each decision feels monumental, and it’s easy to feel overwhelmed by the magnitude of it all.

One key process that you have to go through is purchase price allocation

This is where you identify and value each asset, both tangible and intangible, as well as liabilities, of the company you’re about to acquire or sell. 

If you overlook this or do it incorrectly, you could: 

  • pay more in taxes than necessary,
  • get into disputes with tax authorities, leading to costly audits and fines, and
  • not get the full value from your deal.

To help you navigate this topic, I put together this guide on purchase price allocation. 

I’ll discuss what it is, why it’s important, and how to allocate purchase price for different asset classes.

Key Takeaways:

  • There are four key components of purchase price allocation: tangible assets, intangible assets, liabilities, and goodwill. 
  • You need to allocate purchase price in asset sales for accurate financial reporting, taxation, and decision-making.
  • Experts use three popular valuation methods which are carefully applied based on your business stage, finances, cap table, and other factors.
  • PPA is often too complex for an individual to complete accurately on their own.

What is the Allocation of Purchase Price in Asset Sale? 4 Key Components You Need to Know

4 key components of allocation of purchase price in asset sale

The allocation of purchase price in asset sale is the process of assigning the total price of a company to assets, such as buildings, trademarks, and loans.

When you acquire a company, you need to allocate the total purchase price across the assets obtained.

This is necessary to properly record the assets on the buyer’s financial statements and to determine the tax consequences of the transaction.

When allocating the purchase price, you need to consider key components such as tangible assets, intangible assets, liabilities, and goodwill. 

Let’s look at each of them in detail.

1. Tangible Assets

Tangible assets are physical things the company owns, such as:

  • Buildings
  • Land
  • Equipment
  • Inventory 

Allocating the purchase price to tangible assets means figuring out their true market value.

Fair or true market value is found out by considering factors such as age, condition, and market demand.

Intangible assets are non-physical assets that hold value for a company, such as:

  • Trademarks and brand names
  • Customer relationships 
  • Technology and intellectual property
  • Licenses and permits
  • Non-compete agreements

The process of allocating intangible assets is more difficult as their value is subjective and based on future earning potential. 

To ensure accurate and reliable valuation of intangible assets during the PPA process, I recommend you consider the following best practices:

  • Engage experienced valuation professionals: The valuation of intangible assets can be complex and requires specialized knowledge and experience. Engaging qualified valuation professionals, like Eton, can help ensure accurate and reliable results.
  • Use multiple valuation techniques: Employing a combination of valuation techniques can provide a more comprehensive and reliable estimate of an intangible asset’s fair value. The choice of techniques should be based on the nature of the asset, the availability of data, and the specific circumstances of the transaction.
  • Conduct thorough due diligence: Comprehensive due diligence is essential to identify all relevant intangible assets and gather the necessary information for their valuation. This includes reviewing contracts, intellectual property records, customer lists, and other relevant documents.
  • Consider industry-specific factors: Intangible assets can vary significantly across industries, and their value may be influenced by industry-specific factors. Understanding the industry landscape and the competitive dynamics affecting the acquired business can help inform the valuation process.
  • Stay current with accounting standards and regulations: The treatment of intangible assets in PPA is subject to accounting standards and regulations that may change over time. Staying current with these standards and adapting valuation practices accordingly is essential to ensure compliance and avoid potential financial reporting or tax issues.

Liabilities are what the company owes to others, such as:

  • Loans
  • Accounts payable
  • Accrued expenses

Allocating the price to liabilities makes sure the buyer takes care of them and shows them correctly on their financial records.

Goodwill is an important part of PPA. It represents things like:

  • The company’s reputation
  • Organization culture
  • Customer base
  • Employee loyalty
  • Potential for future earnings
  • Other intangible factors that contribute to its overall worth

It is considered an indefinite-lived intangible asset and is not amortized but tested for impairment at least annually.

Accounting professionals calculate goodwill as the excess of the purchase price over the fair market value of net identifiable tangible and intangible assets. 


Goodwill = Purchase Price – Fair Value of Identifiable Net Assets


  • Purchase Price: This is the total amount paid to acquire the company.
  • Fair Value of Identifiable Net Assets: This is the sum of all assets acquired and liabilities assumed, measured at their fair market value. It involves adding up the fair values of all identifiable tangible and intangible assets and subtracting the fair values of any liabilities.

Why Do You Need to Allocate Purchase Price in Asset Sale? 3 Reasons

Now that you understand the what, let’s get into the why.

Purchase price allocation is an essential part of a business sale or acquisition because it impacts financial reporting, taxation, and even the decision-making process.

Here’s how:

1. Financial reporting

When a company acquires assets, it needs to accurately reflect their value on its balance sheet.

By allocating the purchase price to the different components of the transaction, the company can provide a clear and transparent representation of its assets’ worth.

For example, Tech Innovations buys another company called Gadget Corp for $1 million. 

In financial reporting, Tech Innovations must show the true value of everything it got from Gadget Corp on its balance sheet. 

So, it breaks down the $1 million:

  • $200,000 for the office building (a tangible asset)
  • $300,000 for the brand name (an intangible asset)
  • $150,000 for the customer lists (an intangible asset)
  • $350,000 for patents (an intangible asset)

Now, Tech Innovations’ balance sheet clearly shows not just a $1 million purchase but exactly what that $1 million bought. 

This information is crucial to make sure investors, lenders, and other stakeholders make the right financial decisions. 

2. Taxation

Taxation is another area where purchase price allocation plays a significant role. 

Different components of an asset sale may have different tax implications. 

For example:

  • Real Estate might face capital gains taxes if sold at a profit.
  • Inventory is usually subject to sales tax when eventually sold.
  • Goodwill and R&D projects can offer tax advantages through amortization or deductions over time.

By properly allocating the purchase price, businesses can figure out the tax liabilities for each asset bought or sold. 

Both the buyer and seller must complete IRS Form 8594 during the sale to report the sale and purchase of business assets. 

The form helps categorize the business into its different components.

By accurately filling out Form 8594, businesses can correctly determine the tax implications of each component. 

This information is crucial for tax planning purposes and ensures compliance with applicable tax laws and regulations.

3. Decision-Making

PPA affects whether buyers and sellers go through with a deal. 

Buyers use it to see the real worth of what they’re buying. 

This knowledge helps them make informed decisions about the potential return on investment and the overall financial impact of the transaction. 

Sellers use purchase price allocation to negotiate a fair price for their assets and maximize their financial gains.

For example, GlobalTech is considering buying InnovateTech for $5 million.

During the PPA process, it finds risks in patents’ validity and customer loyalty, lowering its value. 

Despite InnovateTech’s market potential, GlobalTech doubts the deal’s worth. 

Now without a price adjustment or resolution, the deal risks falling through.

How to Allocate Purchase Price in Asset Sale [3 Steps]

How to Allocate Purchase Price in Asset Sale [3 Steps]

Here is what a typical PPA process looks like in detail:

Step #1: Valuation Modeling and Analysis

The first step in the allocation process is to identify the assets and liabilities and how much they’re worth.

This involves assessing each component’s fair market value and considering factors such as the asset’s condition, market demand, and future earning potential. 

Additionally, parties may enlist the expertise of valuation professionals to ensure accurate assessments.

Valuation professionals use different methods, such as:

  1. Income approach: Estimates the value based on the future income the asset is expected to generate.
  2. Market approach: Compares the asset to similar assets that have recently been sold.
  3. Cost approach: Estimates the value based on the cost to replace the asset.

Which of the three approaches fits your business well depends on your business stage:

  • Raised funding but aren’t yet profitable: 

Generally speaking, early-stage start-ups that have raised funding but aren’t yet profitable will rely on the market approach. 

It is because it’s hard to guess future earning potential at this stage.

  • No funding and no revenue: 

If the company has neither funding nor revenue, use the cost approach. 

It’s because at this stage, the company is unable to reliably forecast financials.

  • Businesses with positive cash flow: 

The income approach is often applied to businesses that are bringing in revenue with a positive cash flow. 

They will be able to forecast financials.

At Eton, our s look to see if one (or all three) approaches fit your situation and will continue to consider them as options throughout the valuation process.

Other than the business stage, we also look at the following factors when doing PPA:

  • cap table
  • existing financials
  • industry trends and market conditions
  • recent financing (and who invested and at what valuation)
  • stock option and equity grant practices
  • intellectual property and intangible assets
  • potential risk factors, such as market risk, financial risk, operation risk, compliance risk, product risk, liquidity risk, etc.

Every PPA is unique, and the emphasis on these factors can vary depending on the specific circumstances and characteristics of the company being valued. 

Your company might have considerations that another wouldn’t.

→ During the valuation analysis, it’s also important to consider any intangible assets that may be present, such as patents, trademarks, or customer relationships. 

These assets can have significant value and should be properly identified and valued.

Step #2: Determine the Fair Market Value

Once the analysis is complete, the next step is to determine the fair market value of each asset or liability. 

This is crucial as it serves as the basis for allocating the purchase price. 

Simply put, fair market value is the price that the buyer is willing to pay and the seller is willing to accept for an asset or liability—provided that both parties know the important details and neither is being forced to buy or sell. 

It’s generally determined through a combination of methodologies, such as income approach, market approach, and cost approach.

In some cases, the fair market value may be determined by using observable market prices. 

For example, if the asset being valued is a publicly traded stock, the fair market value can be determined by looking at the current market price.

Step #3: Allocate the Purchase Price in Asset Sales

The final step in the process involves allocating the purchase price among the identified components. This is typically done based on their relative fair market values. 

The allocation should be well-documented and supported by credible evidence to ensure compliance with relevant accounting and tax regulations.

It’s important to note here that the allocation of purchase price can have significant financial and tax implications for both the buyer and the seller.

It can also have a huge impact on future financial reporting, as it affects the values assigned to the acquired assets and liabilities. 

This is why it’s best to work with a qualified professional who can provide an accurate, reliable, and court-defensible allocation.

This way the PPA gets safe harbor status from the IRS, meaning the onus is on them to prove that the PPA is inaccurate if audited.

How Eton Can Help: Our Purchase Price Allocation Service

The PPA process is complex, and requires a deep understanding of financial modeling, tax laws, and market analysis.

At Eton, our main goal is to help you navigate through this, while providing you with the most accurate PPA valuation in as short as 10 days.

Our Big-4 trained experts understand the complexity of purchase price allocation, and have proven track record in helping clients gain confidence in their fair value reporting.

A screenshot of review from Eton customer

We’ve fine-tuned the PPA valuation process to be as smooth as possible for you.

This is how it will look like if you work with us:

  • Day 1: You’ll then do an initial call and share the proper documentation and information with us.
  • Day 2-8: We then conduct an initial modeling and analysis aligned with IRS rules and your goals, followed by an in-depth review and report creation.
  • Day 8-10: We send you a draft report, then incorporate feedback and the changes needed.

Book a call with me today to discuss your PPA needs.

4 Best Practices for an Accurate Purchase Price Allocation 

If you are conducting the purchase price allocation on your own, I recommend you to follow these best practices to get the most accurate valuation:

  • Value Each Asset Class Individually

When allocating the purchase price of a business, you must value each asset class separately.

Then, distribute the total sale price across the asset classes based on their relative fair market values. 

The asset classes typically include tangible assets like inventory, equipment, and real estate as well as intangible assets such as intellectual property, customer relationships, and goodwill.

  • Choose an Appropriate Valuation Methodology

The valuation methodology selected depends on the nature of the asset. 

For tangible assets, methods like replacement cost or market comparison are often used. 

Intangible assets require more complex methods, such as the income approach or cost approach. 

The valuation methodology must be well-documented to substantiate the allocation.

  • Consider the Tax Implications

The purchase price allocation has significant tax consequences for both the buyer and seller. 

Assets are depreciated or amortized over time for tax purposes, so their classification and valuation impacts the deductibility of expenses. 

The allocation also determines whether the sale is taxed as an asset sale or stock sale for the seller, which can impact the tax rate. 

I advise you to consult tax professionals to get this squared away. 

  • Allocate Residual Amount to Goodwill

Any amount of the total purchase price remaining after allocating values to the identifiable assets is allocated to goodwill. 

Goodwill represents intangible assets like reputation, brand, and competitive position. 

While goodwill is not depreciable for tax purposes, it must be valued to determine the appropriate allocation of the purchase price.

If you need a fast, accurate, and reliable purchase price allocation support, please get in touch with me here.

Allocation of Purchase Price in Asset Sale – FAQs

Have more questions about purchase price allocation? I answered them below:

What are the main asset classes in PPA?

The main asset classes are: 

  • Cash and Bank Deposits (Class I): This includes cash on hand and funds in business bank accounts. The total value of these liquid assets is assigned to Class I.
  • Securities (Class II): This includes publicly traded investments like stocks, bonds, certificates of deposits, and actively traded personal property. The aggregate market value of these securities is allocated to this class.
  • Accounts Receivable (Class III): This includes amounts owed to the business by customers and clients in the ordinary course of business.The net realizable value, defined as the amount expected to be collected, is assigned to this class.
  • Inventory (Class IV): This includes raw materials, work in progress, and finished goods intended for sale. Inventory is typically valued at the lower of cost or net realizable value. This represents the amount the inventory can be sold for, less any costs to sell.
  • Property, Plant and Equipment (Class V): This includes tangible assets used in the business like machinery, equipment, furniture, fixtures, and vehicles. These long-lived assets are valued at their fair market value, which is the price that would be received to sell an asset in an orderly transaction between market participants.
  • Intangible Assets (Class VI): This includes intangible assets lacking physical substance, such as intellectual property, customer lists, brand names, and non-compete agreements. These assets are valued based on the present value of the future economic benefits they are expected to generate.
  • Goodwill (Class VII): This includes the value of intangible assets like brand name, customer loyalty, and reputation.

Due diligence is a crucial aspect of the purchase price allocation process during mergers and acquisitions (“M&A”) and business combinations. 

Thorough due diligence helps ensure that the PPA is accurate, compliant with accounting standards, and optimized for tax purposes. 

We wrote an extensive guide on due diligence here

At Eton, we can deliver a purchase price allocation report in 10 days. We can even turn it around in as short as 1 day for an extra fee.

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President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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