Stock Sale - Allocation of Purchase Price
In a stock sale, the corporation is the legal "owning entity" of the company, and the purchase price may be allocated completely (100%) to the sale of the stock. However, in tightly held non-public corporations, the purchase price is frequently allocated to the company's stock in addition to "service contracts" or "service agreements" such as:
- Value of the stock
- 2) Value of the Covenant Not to Compete, which is provided the buyers from key individuals selling the corporate stock
- 3) Value of Training, which is provided the buyers are the key individuals selling the corporate stock who also manage / operate the company
Due to the current U.S. tax structure, sellers usually prefer to have most (if not all) of the purchase price allocated to the value of the stock, since that is usually taxable at Capital Gains tax rates, and that tax rate currently is usually much more favorable than the seller's Ordinary income tax rate. Of course, buyers usually prefer to minimize the value attributed to the stock in order to place larger values to the Covenant No to Compete and the Training & transition, since the covenant and training values allow the buyers to "write off" those portions of the overall purchase price.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase Price
Section 3: Non-Stock Sale - Allocation of Purchase Price
Section 4: Tax Implications - General Guidelines
Section 5: Key Points - Allocation of Purchase Price
