Asset purchase price allocation: how to calculate it and agree it
Short answer
To calculate an asset purchase price allocation, total the consideration (cash, seller note and liabilities assumed), list every asset transferring by IRS class, support each one's fair market value, then allocate in class order from Class I to VI, capping each asset at fair market value, and give the remainder to goodwill. Agree the result in writing in the asset purchase agreement, because a signed allocation generally binds both buyer and seller on Form 8594.
Almost every small business sold with an SBA loan is sold as an asset purchase, and every asset purchase needs a price allocation. Buyers tend to discover this when their tax preparer asks for it the following spring. By then the seller has moved on and has no reason to cooperate. This page shows how to calculate the allocation and how to get it agreed in the purchase agreement while both sides still want the deal to close. It isn't legal or tax advice; your lawyer drafts the clause and your tax adviser checks the numbers.
How to calculate it, step by step
- Fix the total consideration. Cash at closing, plus any seller note, plus liabilities the buyer assumes (customer deposits, accrued vacation, equipment loans taken over), plus specific transfer costs your adviser says belong in basis. Treasury regulation 1.1060-1 adds assumed liabilities to cash in its own example.
- List the assets that transfer. Work from the bill of sale and the excluded-assets list. Sort them into the seven classes using the Form 8594 definitions.
- Support fair market value for Classes I to VI. Cash at face value; receivables at what's collectible; inventory from a count at closing; equipment and vehicles from an appraisal; real estate from an appraisal; material intangibles from a valuation.
- Run the residual method. Subtract Class I, then allocate to Classes II, III, IV, V and VI in order, each asset up to its fair market value, sharing pro rata within a class if the money runs out.
- Give the remainder to Class VII. That's goodwill and going concern value.
- Check it. The rows add up to total consideration; no Class I to VI asset is above its supported value.
- Put it in writing and sign it. Usually a schedule attached to the purchase agreement; see the allocation schedule template.
Worked example
Illustration, not a real deal
Say you're buying the assets of a pet grooming and boarding business. The price is $780,000: $680,000 in cash at closing and a $100,000 seller note. You also take over $20,000 of prepaid boarding packages, which you'll have to honour. You aren't buying the seller's cash or receivables. Supported values on the closing date: retail products $18,000; grooming tables, kennels, dryers and a van $95,000; the business's leasehold improvements $40,000; a customer database valued at $60,000; and a three-year non-compete valued at $25,000.
| Step | Calculation | Result |
|---|---|---|
| Total consideration | $680,000 + $100,000 + $20,000 | $800,000 |
| Class IV retail products | $800,000 − $18,000 | $782,000 left |
| Class V equipment, van, improvements | $782,000 − ($95,000 + $40,000) | $647,000 left |
| Class VI database and non-compete | $647,000 − ($60,000 + $25,000) | $562,000 left |
| Class VII goodwill | Residual | $562,000 |
Form 8594 line 3 shows total consideration of $800,000; line 4 shows Class IV $18,000, Class V $135,000, and Classes VI and VII combined at $647,000. The non-compete also triggers the line 6 question about related agreements, with a statement of the maximum consideration under it.
Who drafts the numbers
In most small deals the buyer's side drafts the schedule. The buyer needs asset-level basis to set up depreciation, usually has the appraisals the lender ordered or relied on, and is the one who will live with the numbers for 15 years. The seller's adviser then reviews it, mainly checking the equipment line (which drives recapture) and any non-compete figure (which is ordinary income to the seller). If the seller has better information about an asset, such as recent repair history or the real condition of slow-moving stock, the review is the time to bring it. Agreeing who drafts, and by when, is a small point that prevents a lot of late-stage friction.
Where buyer and seller can negotiate
Buyers generally want value in inventory and equipment, which they recover faster; sellers generally want it in goodwill, which is often capital gain to them. The rules leave less room than either side hopes, because every class but goodwill is capped at fair market value and the residual method fills the classes in order. The table shows where the real room is.
| Item | Room to negotiate | Why |
|---|---|---|
| Equipment value | Within the appraised range | Fair market value is a range, not a point |
| Inventory value | Within accepted methods | IRS guidance allows several methods for inventory fair value |
| Separate customer list or contracts | Some | Valuing them moves value from VII to VI; little effect on the buyer, who amortizes both over 15 years |
| Non-compete value | Limited to what its terms support | Generally ordinary income to the seller; same 15 years for the buyer |
| Anything above fair market value in Classes I to VI | None | The cap in the regulations |
| Consulting pay in the price | None | Services are compensation, not purchase price |
The detailed tax effects are in purchase price allocation tax considerations.
What the purchase agreement should say
A good allocation clause covers the timing, the process and the consistency promise. In the order your lawyer will probably think about them:
- The allocation follows Section 1060 and the regulations and is set out in a named schedule.
- If not final at signing: the buyer delivers a draft within a stated number of days after closing; the seller has a stated period to object in writing; unresolved items go to an independent accountant whose decision is final; fees are split.
- Both parties file Form 8594 and all returns consistently and won't take a contrary position unless a final determination requires it.
- Post-closing adjustments (working-capital true-ups, rebates) are allocated under the Form 8594 rules, with supplemental statements filed by whoever is affected.
- Each party notifies the other of any audit inquiry about the allocation.
Line 5 of Form 8594 asks whether the parties provided for an allocation in the sales contract or another written document signed by both, and whether the fair market values reported are the agreed amounts. A signed schedule lets both sides answer yes with the same numbers.
Keep it consistent with the SBA loan file
On an SBA-financed purchase, the allocation and the loan file are separate documents that a reviewer may read side by side. A few practical points under SOP 50 10 8.1 as of October 2026:
- The SBA valuation must support the Business Purchase Price as a whole. The allocation doesn't change that.
- Equipment figures in the schedule should be consistent with any equipment appraisal the lender used for collateral, even though the lender applies its own haircuts.
- If owner-occupied real estate is part of the deal, the lender takes the appraised real estate value out of the contract price to get the Business Purchase Price. The real estate line in your allocation should line up with that appraisal; see purchase price allocation and real estate.
- Seller earnouts are prohibited; a buyer rebate tied to performance is allowed and must pay down the 7(a) loan. A rebate is a decrease in consideration and triggers a supplemental Form 8594 if it lands in a later year.
- The seller can consult for up to 24 months. That pay belongs in a consulting agreement, not in the price.
Costs of financial due diligence reports can be passed to the borrower under the SOP, and borrower out-of-pocket expenses for valuations are an eligible use of loan proceeds, so it's worth asking the lender whether allocation work can be scoped alongside the SBA valuation. For the legal framework behind all of this, see Section 1060 purchase price allocation. Checked against the Form 8594 instructions and SOP 50 10 8.1 as of October 2026.
Common questions
When should the allocation be agreed?
Ideally before signing, or at least before closing, while both sides still have something to trade. Agreements that leave it to after closing should set a deadline, an objection period and a tie-breaker.
Who pays for the valuation work?
It's negotiable. Buyers often pay because they need asset-level basis, but sellers benefit from a defensible schedule too. On SBA loans, the borrower's out-of-pocket costs for financial due diligence reports can be eligible uses of proceeds.
What if we can't agree the allocation?
Each side then files its own Form 8594 and answers No to the question about a signed allocation. It's legal, but inconsistent filings tend to attract questions, so most agreements include a dispute mechanism.
Does the allocation affect the SBA loan amount?
Not directly. The SBA valuation must support the purchase price as a whole and the lender applies its own collateral haircuts. The allocation should still be consistent with any equipment or real estate appraisal in the loan file.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.