Allocating the purchase price of a franchise resale
Overview:
Allocating the Purchase Price is a necessary step for a buyer and seller when completing the purchase and sale of a business, including franchise resales.
It is best to consult your tax advisor for more details but here are the basics:
The allocation of purchase price assigns the value of an acquired company or asset to specific tangible and intangible assets and liabilities in the acquisition. The objective of purchase price allocation is to assign a fair market value to the assets and liabilities that are being acquired, including the goodwill being acquired.
The purchase price asset allocation helps in determining the seller’s tax liabilities and the buyer’s tax basis in the assets being acquired.
There are tax implications for both buyer and seller, so each should consult with their accountant to best understand and consider the tax implications prior to finalizing them. The information provided here does not constitute legal or tax advice for your unique situation or for any particular deal.
Here's an example:
Let’s consider how the purchase price might be allocated on a simple $250,000 transaction:
•Inventory & Supplies: $10,000 (Market Value of inventory and supplies included in the sale)
•Franchise Territory/Rights: $40,000 (Typically the cost of the Franchise Territory)
•Furniture Fixtures & Equipment: $50,000 (Market Value of assets included in the sale)
•Non-Compete: $3,000 (Typically a small amount, if any)
•Training and Transition Assistance: $2,000 (if any)
•Goodwill: $145,000 (the rest of the price allocation balance goes here)
•Total: $250,000 (should total the sale price of the business and items listed above)
The allocation of purchase price will likely be included in your purchase agreement showing that both the buyer and seller have agreed to these terms. The numbers agreed to will likely be needed for completing the tax returns for both the franchise seller and the franchise buyer, so it is important that the buyer and seller agree to and use the same allocation.
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