What is Purchase Price Allocation?

What it is

How the purchase price gets divided across asset categories (inventory, equipment, customer lists, goodwill, non-compete) for tax purposes on IRS Form 8594. Buyer wants more allocated to depreciable or amortizable assets; seller wants more allocated to long-term capital gain assets.

Why it matters in your deal

For self-funded ETA buyers and acquisition counsel, purchase price allocation matters because it can change economics, leverage, closing certainty, post-close exposure, or the attorney questions that need to be answered before capital is committed. Risk signal: Medium. A $500K shift can change buyer depreciation by $100K and seller tax bill by $100K.

Real example

A self-funded ETA buyers and acquisition counsel can see purchase price allocation language that looks routine until it controls leverage, money, timing, remedies, or closing risk. The practical question is not just what the clause says, but what it lets the other side do when the deal becomes stressed.

Red flags to watch

• •One-sided language that gives the other party discretion while limiting your consent, notice, cure, or remedy rights.
• •Undefined dollar caps, timing rules, notice methods, survival periods, territory, or trigger conditions.
• •Cross-references that move the real obligation into an exhibit, schedule, FDD item, lease addendum, or outside policy.
• •Terms that conflict with the self-funded ETA buyers and acquisition counsel diligence plan, financing assumptions, operating model, or counsel review checklist.

What to do

1. 1Quote the operative purchase price allocation language and send the full surrounding section to counsel.
2. 2Tie the clause to economics, timing, remedies, assignment rights, consent requirements, and any closing condition it affects.
3. 3Ask for revisions that replace discretion with objective standards, defined notice periods, measurable caps, and clear cure rights.
4. 4Confirm the governing law, jurisdiction, and document cross-references before relying on the clause in negotiation.

Sources

1. Cornell Legal Information Institute - asset purchase agreement
2. Cornell Legal Information Institute - mergers and acquisitions
3. ABA Model Asset Purchase Agreement with Commentary