PPA intangible assets: what to identify, and how each is valued

Published October 25, 2026 · Rules checked against SBA and IRS sources as of October 2026

Short answer

In a purchase price allocation, identifiable intangible assets are the Section 197 intangibles other than goodwill: customer lists and contracts, trade names, non-competes, licences and permits, know-how, and workforce in place. They form Class VI for tax, amortized by the buyer over 15 years. Each is valued with a method suited to it, typically excess earnings for customer relationships, relief from royalty for trade names and a with-and-without comparison for non-competes, and goodwill takes what's left.

Ask the seller of a small business what intangible assets they have and you'll get a blank look, then "the customers, I guess." The tax code is more specific. Section 197 lists the intangibles that get 15-year amortization when you buy a business, and the Form 8594 instructions put all of them except goodwill and going concern value into Class VI. Identifying them properly changes the goodwill figure, the seller's tax, and what your GAAP books show. This page goes through the list, shows how each type is usually valued, and flags what's excluded. It's general information, not tax or valuation advice.

The Class VI list

The Form 8594 instructions list the Section 197 intangibles that land in Class VI. Here's what each tends to look like in a small business deal:

Section 197 intangible	Small-deal example	Usual valuation approach
Customer-based intangibles	Service agreements, recurring accounts, customer lists, an insurance book	Multi-period excess earnings; sometimes with-and-without or a cost approach for a simple list
Trademarks and trade names	The business name, a known local brand	Relief from royalty
Covenant not to compete	Seller agrees not to compete for a set period and area	With-and-without (cash flows with and without the covenant)
Licences and permits from a government unit	Liquor licence, certain transferable permits	Market evidence where licences trade; otherwise cost or income
Franchise	Franchise agreement transferred to the buyer	Often cost-based, such as the transfer fee, or folded into other intangibles
Workforce in place	Trained technicians, staff who stay	Cost to recruit, hire and train replacements
Books, records, systems, know-how, processes, designs	Operating manuals, recipes, job-costing systems	Cost approach; often immaterial alone
Supplier-based intangibles	Favourable supply arrangements	Excess earnings or with-and-without

What is not a Section 197 intangible

The exclusions matter because they change where an asset sits and how fast it's recovered. The Form 8594 instructions and Section 197(e) exclude, among other things, interests in a corporation, partnership, trust or estate; interests in land; interests under leases of tangible property; interests under indebtedness; certain separately acquired rights; and certain computer software. On software, Section 197 excludes software that is readily available for purchase by the general public, subject to a nonexclusive licence and not substantially modified. Custom software acquired as part of the business can be a different story; ask your adviser.

A leased building is a common example. The lease interest isn't a Class VI intangible even if the rent is below market. And remember the seller's consulting agreement isn't an intangible either: it's pay for services, outside the purchase price.

Common pairings. A valuation analyst picks the method that fits the facts and the data available.

How the main methods work

Relief from royalty (trade names)

The idea: if you didn't own the name, you'd have to license it. The value is the present value of the royalties you avoid paying, after tax.

Illustration, not a real deal

Say a regional pool service company has $2,000,000 of annual revenue under its name. Assume, for illustration only, a 2% royalty rate, a 25% tax rate and that the name is valued over a period using a present-value factor of 6.0 for the after-tax royalty stream (that factor would come from the analyst's chosen life and discount rate).

Pre-tax royalty saved: $2,000,000 × 2% = $40,000 a year.
After tax: $40,000 × (1 − 25%) = $30,000 a year.
Value: $30,000 × 6.0 = $180,000.

Every input there is an assumption that needs support: the royalty rate from comparable licences, the revenue that actually depends on the name, the life and the discount rate. For a small local business, the honest answer is often that the name adds little apart from the customer relationships.

With and without (non-competes)

Value the business's cash flows twice: once with the covenant in place, and once assuming the seller competes. The covenant's value is the present value of the difference, adjusted for how likely the seller is to compete at all. A 68-year-old retiring to another state has a low probability of competing; a 40-year-old with a client following who's moving across town is a different story. This is the method most likely to stop an inflated non-compete number, which helps the seller, who generally reports non-compete payments as ordinary income.

Excess earnings (customer relationships)

Start with the earnings expected from existing customers over their remaining life, allowing for attrition. Subtract a fair return on every other asset that helps generate those earnings: working capital, equipment, the trade name, the workforce. These deductions are called contributory asset charges. What remains, discounted to today, is the customer relationship value. It's the most data-hungry method and the one most sensitive to the attrition assumption, which is why customer retention history matters so much in diligence.

Cost approach (workforce, systems)

What would it cost to recruit, hire and train a replacement team, or rebuild the systems? Used mainly for tax, because GAAP under ASC 805 doesn't recognize an assembled workforce separately from goodwill.

Does it change the buyer's tax?

Less than people think. Section 197 intangibles in Class VI and goodwill in Class VII are both amortized straight-line over 15 years starting with the month of acquisition. Moving $100,000 from goodwill to a customer list doesn't change the buyer's annual deduction. Where separate identification does matter:

Seller's tax character. A non-compete allocation is generally ordinary income to the seller; goodwill is often capital gain.
Losses on disposal. Under Section 197's loss rule, as IRS Publication 544 explains, if you dispose of one intangible from a deal while keeping others acquired in the same transaction, the loss is generally not deductible and is added to the basis of the ones you keep.
Non-compete timing. A Section 197 covenant can't be treated as disposed of or worthless before you dispose of your entire interest in the business it relates to.
Book accounting. Under ASC 805 each recognized intangible gets its own life and impairment profile, unless a private company elects to fold customer intangibles and non-competes into goodwill; see ASC 805 purchase price allocation.
Form 8594 line 6. A non-compete, licence, lease or employment arrangement with the seller has to be disclosed, with the maximum consideration under it.

When to value intangibles separately

Usually worth a separate value

A contract book or recurring accounts that drive the price
A non-compete with real terms and real consideration
A brand that customers recognize beyond the owner
Transferable licences that trade in a market
Any deal where the buyer keeps GAAP books

Often fine to leave in goodwill

An informal customer list with no contracts
A name known only through the owner
Manuals and systems with no standalone value
Small deals where no single item is material

Whatever you decide, record it in the signed allocation schedule so both parties report the same Class VI and VII figures. For the residual method and class order, see the purchase price allocation guide; for how goodwill is treated once the intangibles are carved out, see allocation of purchase price to goodwill. Section 197 rules checked on Cornell LII and IRS.gov as of October 2026; ask your tax adviser how they apply to your deal.

Common questions

Does the buyer get faster deductions by valuing intangibles separately?

Usually not for tax. Class VI intangibles and Class VII goodwill are both amortized over 15 years, so moving value between them changes little for the buyer. It matters more for the seller, for book accounting and for later impairment or disposal.

Is off-the-shelf software a Section 197 intangible?

No. Section 197 excludes computer software that is readily available to the public, subject to a nonexclusive licence and not substantially modified. The Form 8594 instructions list certain computer software among the exclusions.

Is a lease a Class VI intangible?

Interests under leases of tangible property are excluded from Section 197. A favourable lease is generally handled under the lease rules rather than as a 15-year intangible; ask your adviser how to treat it.

Do small deals really need an intangibles valuation?

Not always. If no single intangible is material, many buyers leave them in goodwill for tax. A non-compete with real value, a valuable trade name or a contract book that drives the price usually deserves its own number.

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.