Don't over look tax allocation when buying a business

The majority of small businesses are sold as asset sales. This means the seller sells specific assets which often include inventory, equipment, customer lists, goodwill, vehicles, etc. It's not enough to agree to a price for these things, buyer and seller should agree to how the total price is allocated. There are significant tax consequences and risks if you don't do this. The process is called the Allocation of Purchase Price.

For instance, Joe sells his auto repair shop to Mary for $300,000. That's good but now you need to agree on how much of the $300,000 goes to which assets. In particular the seller will be sensitive to any allocation, about book value, of the price to assets that the seller has depreciated already. Why? Because depreciation recapture has bad tax consequences for the seller. Also, the allocation has consequences to the buyer, primarily when the buyer can "write-off: the price of the assets she bought...5 years? 7 years/ 15 years? etc.

Make sure you get professional tax advice and cover all the bases!