Guide
Allocation: the clause that changes your net, not the price
Updated
Sellers negotiate the price, then sign the allocation: backwards. The allocation can move proceeds more than the last price round, and costs the buyer nothing to discuss early.
Start the valuation Tell us the fee base, the work mix and how you want to exit. Up to three M&A advisers will contact you directly.
What the IRS requires
A sale of a business is not the sale of one thing. The IRS treats an asset sale as a transfer of separate assets. They are sorted into capital assets, depreciable property used in the business, real property used in the business, and property held for sale to customers.
Each class is taxed differently: capital assets produce capital gain or loss, depreciable and real property held over a year produce section 1231 treatment, and inventory produces ordinary income. Both buyer and seller must then use the residual method to allocate the consideration across them.
Because both parties file consistently with the same allocation, it is negotiated rather than assumed, and it belongs in the contract.
Why buyer and seller want different answers
The buyer generally wants consideration weighted towards assets they can recover quickly. The seller generally wants it weighted towards capital treatment. Those pull in opposite directions and the tension is normal.
What is not normal is discovering it at signing. Raise allocation in the first commercial conversation, alongside price, and treat a refusal to discuss it as information.
A stock sale changes the question entirely
Where the practice is incorporated and you sell the stock, not the assets, the IRS position is simpler. Your interest is represented by stock certificates, and the sale usually realises capital gain or loss.
Buyers often resist, because they inherit the entity's history along with its clients. Which structure you land on is a commercial negotiation with a tax consequence, not a technicality, and it should be settled before an engagement letter fixes anybody's fee.
Who is allowed to broker the sale
Most advisers in this market are not registered with anyone, and usually that is lawful. The M&A broker exemption at 15 U.S.C. 78o(b)(13) covers an eligible privately held company's sale. Prior-year EBITDA must be under $25,000,000 or gross revenues under $250,000,000, and the buyer expected to control and actively manage the business.
It falls away if the broker takes custody of transaction funds, which includes some escrow arrangements. Worth asking, in writing, before you sign anything.