Purchase price allocation
The agreed split of an asset-sale price across asset classes, which drives the tax outcome for both sides.
Also called: PPA · Allocation of purchase price
In an asset sale the total price has to be allocated across categories — equipment, inventory, receivables, non-compete covenants, goodwill and other intangibles. Each category carries different tax consequences, and because the buyer and seller usually face opposite consequences, the allocation is genuinely adversarial even after the price is agreed.
Buyers generally prefer allocation to assets they can deduct or depreciate quickly. Sellers generally prefer allocation to categories taxed at the most favourable rate available to them, which in many jurisdictions means goodwill rather than depreciable equipment subject to recapture, and rarely means a large allocation to a personal non-compete covenant, which is often taxed as ordinary income.
The allocation is normally documented in the purchase agreement and filed consistently by both parties. Getting it agreed while the price is still being negotiated, rather than in the closing week, avoids a late fight over a number that can move a seller's after-tax proceeds materially.
Where sellers get caught
- Agreeing a headline price without ever discussing allocation, then discovering the after-tax outcome in the final draft.
- Accepting a large non-compete allocation without checking how it is taxed where you live.
- Inconsistent filings between buyer and seller, which invites scrutiny of both.
Common questions
Does allocation matter in a share sale?
Much less, because the buyer acquires the entity rather than individual assets. It is primarily an asset-sale issue.
Can the buyer and seller allocate differently?
They are generally expected to file consistently, and inconsistent positions attract attention. The purchase agreement usually requires consistency.
Related terms
Asset sale
A transaction in which the buyer purchases specified assets and assumes specified liabilities, rather than buying the legal entity itself.
Stock sale
A transaction in which the buyer purchases the shares of the company itself, acquiring the entity together with all of its assets and liabilities.
Non-compete
The seller's agreement not to compete with the sold business for a defined period within a defined area, usually accompanied by non-solicitation covenants.
Enterprise value
The value of the business itself, independent of how it is financed — and not the amount the seller receives.
Guides that use this term
Where purchase price allocation comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.