How should the agreement define the revenue figures?
The agreement can define which revenue measure counts, for which period and on what accounting basis, as one filed agreement did by requiring the buyer to prepare a computation of revenue under GAAP for its computation period and a separate computation showing each adjustment made to reach adjusted revenue.
The definition matters most where part of the price turns on the figure: the same agreement reduced the purchase price if its minimum revenue target was not attained for the computation period. It also required the buyer to keep separate accounting books and records for the business during that period.
The definition can state whether revenue is gross or net of listed deductions: the same agreement started its adjusted revenues from gross revenues of the business and listed each adjustment, and another filed agreement measured a profit figure from net revenue less bad debt and customer chargebacks and credits.
The seller's historical statements may be unaudited, or prepared on the seller's own accounting basis rather than under GAAP, and the financial-statements representation can say which kind of statements the buyer relied on: one filed agreement included an unaudited inventory analysis among the statements covered by its financial-information representation. The same agreement represented that its financial statements followed the seller's historical accounting policies and practices, consistently applied, and differed from GAAP in a material respect only as set out in a schedule.
The acquisition financial-model guide shows how to carry verified figures into the buyer's model and keep purchase consideration, financing and operating cash separate.
Sources for this answer
The Grove agreement required a revenue computation for the computation period prepared under GAAP and a separate computation showing each adjustment made to reach adjusted revenue.
Promptly following the end of the Computation Period, Buyer shall prepare (i) a computation of revenue of the Business for the Computation Period, which shall be prepared in accordance with GAAP (the “Revenue Statement”), and (ii) a computation of Adjusted Revenue, showing separately each of the adjustments made to Revenue to arrive at Adjusted Revenue (the “Adjusted Revenue Computation Notice”).
See Appendix I, ¶5 (Procedure)(a)
The Grove agreement supports keeping separate business books during its revenue computation period.
Buyer shall maintain separate accounting books and records for the Business during the Computation Period.
See Appendix I, ¶5 (Procedure)(a)
The Grove agreement reduced the purchase price if its minimum revenue target was not attained for the computation period.
However, subject to the following sentence, if the Minimum Revenue Target is not attained for the Computation Period (also called herein a “Revenue Shortfall”) as set forth below, then there shall be a reduction in Purchase Price as provided under this Appendix.
See Appendix I, ¶4(a)
The Grove agreement listed an unaudited inventory analysis among the materials provided as part of its Financial Statements.
Additionally, as part of the Financial Statements, the Seller has provided to Buyer the following: (i) sales by customer by item of inventory for fiscal year 2020 and January 1 through July 31, 2021; (ii) customer sales by month for fiscal year 2020 and January 1 through July 31, 2021; and (iii) unaudited inventory analysis, as revised, dated July 31, 2021; and (iv) sales by customer in dollars for January 1 through July 31, 2021.
See §3.10(b)
The Grove agreement represented that its financial statements followed the seller's historical accounting policies and practices, consistently applied, and differed from GAAP in a material respect only as scheduled.
The Financial Statements of Seller (including the Interim Balance Sheet) have been prepared from and are in accordance with the historical accounting policies, assumptions, methodologies and practices of Seller, consistently applied, which (i) are consistent with the accounting records of Seller; and (ii) differ from GAAP in a material respect only as set forth in Schedule 3.10(c) hereto.
See §3.10(c)
The Grove agreement’s revenue-shortfall appendix defines adjusted revenues as gross revenues of the business, excluding revenue from sales of assets outside the ordinary course and repricing sales to the buyer’s affiliates at arm’s-length amounts.
“Adjusted Revenues” – gross revenues of the Business, adjusted as follows: (a) exclude revenues of the Business from the sale of assets other than in the Ordinary Course of Business; (b) the purchase and sales prices of goods and services sold by the Business to Affiliates of Buyer, shall be adjusted to reflect the amounts that the Target would have received or paid if dealing with an independent party in an arm’s-length commercial transaction.
See Appendix I, ¶1
The Bankrate agreement defines a gross-profit measure as net revenue less bad debt and customer chargebacks and credits, minus traffic acquisition costs.
“Buyer Brand Gross Profit” means (A) the net revenue directly generated by the Buyer Brand Business, less bad debt and customer chargebacks and credits minus the (B) traffic acquisition costs (including media, creative development and technology expenditures) of the net revenue directly generated by the Buyer Brand Business.
See earnout definitions, Buyer Brand Gross Profit
Should the buyer pay a deposit when the purchase agreement is signed?
A deposit at signing can protect the seller, because, as Anthony Wilkinson explains, without one a buyer who later terminates may walk away without financial consequence. The deposit must still be returned to the buyer when the purchase agreement allows the buyer to terminate under specific conditions.
In one filed $700,000 e-commerce asset purchase, the buyer delivered a $175,000 deposit to an escrow agent when the agreement was fully signed, and the deposit was credited to the price and released to the seller if the closing occurred. The same agreement paid $525,000 at closing, made up of a $350,000 closing payment and the deposit, and the last $175,000 thirty days after closing. Paying part of the price after closing is covered under deferred payment.
Anthony Wilkinson describes the deposit as usually held by an independent third party until closing or until the agreement allows the funds to be released. The choice of holder can affect how the process unfolds, particularly when communication or timing becomes important. When the deposit is paid to the seller instead, the buyer's protection is the seller's obligation to refund it, and one filed brewery sale secured that refund obligation with equipment finance agreements until closing or termination.
What happens to the deposit depends on how the agreement addresses closing, termination or buyer default. One brewery sale returned the advance deposit if the closing conditions were not satisfied by the outside date despite the buyer's good-faith efforts and the parties did not agree to extend it. A sale of assets out of bankruptcy let the sellers keep the deposit as a credit at closing or after terminating for the buyer's breach, and otherwise returned it to the buyer after termination, subject to setoff for the buyer's breach. The sellers' termination right in that agreement covered the buyer's material breach of a representation or covenant. Anthony Wilkinson observes that many agreements let the buyer recover the deposit during an initial diligence period, after which it may become non-refundable if the buyer refuses to close without a valid contractual termination right.
For the buyer, the agreement should define the situations in which the deposit is recovered, tied to the conditions and termination rights. The seller, in turn, may be entitled to keep the deposit if the buyer refuses to close after the agreement's conditions have been satisfied. An agreement may also make the deposit the seller's liquidated damages if the buyer defaults. In California, for example, a contract provision liquidating damages for breach is valid unless the party challenging it shows it was unreasonable under the circumstances when the contract was made, except in the consumer and residential-lease cases the statute treats separately. Anthony Wilkinson estimates that the deposit in many business transactions ranges from about 1 percent to 10 percent of the price, varying with the size of the transaction, the level of risk and the competition for buyers; that is a practitioner's estimate, and this guide selects no amount.
Sources for this answer
Anthony Wilkinson explains that a buyer who terminates when no earnest money deposit was required may walk away without financial consequence.
If the buyer later decides to terminate the transaction and no earnest money deposit was required, the buyer may walk away without financial consequence.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson explains that the deposit must be returned when the purchase agreement allows the buyer to terminate under specific conditions.
The earnest money deposit must be returned to the buyer when the purchase agreement allows the buyer to terminate the transaction under specific conditions.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson describes the deposit as usually held by an independent third party until closing or until the agreement allows release.
The funds are usually held by an independent third party responsible for safeguarding the earnest money deposit until the transaction reaches closing or the agreement allows the funds to be released.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson observes that many agreements let the buyer recover the deposit during an initial diligence period, after which it may become non-refundable if the buyer refuses to close without a valid termination right.
Many agreements allow the buyer to recover the earnest money deposit during an initial diligence period. After that period expires, the deposit may become non-refundable if the buyer refuses to close without a valid contractual termination right.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
The iGourmet agreement required the buyer to deliver a $175,000 deposit to an escrow agent on full execution of the agreement.
Upon the complete execution of this Agreement, the Buyer shall deliver a deposit of $175,000 (the “ Buyer Deposit ”) to Weiss Serota Helfman Cole & Bierman, P.L. (the “ Escrow Agent ”), which will hold the Buyer Deposit in accordance with the terms of the escrow agreement in the form attached hereto as Exhibit A (the “ Escrow Agreement ”).
See §1.04(a); agreement dated Aug. 30, 2024
The iGourmet agreement credited the buyer deposit to the purchase price and released it to the seller if the closing occurred.
If the Closing occurs, the Buyer Deposit shall be credited to the Purchase Price and disbursed by the Escrow Agent to Seller at Closing.
See §1.04(a); agreement dated Aug. 30, 2024
The iGourmet agreement paid $525,000 at closing, made up of a $350,000 closing payment and the buyer deposit, and $175,000 thirty days after closing.
(b) The balance of the Purchase Price (subject to prorations and adjustments pursuant to Section 1.04(c) below) shall be payable by wire transfer to the Seller (regarding the Closing Payment and Post-Closing Payment, each as defined below) or Escrow Agent (regarding the Buyer Deposit) of immediately available funds in accordance with the wire instructions set forth on Section 1.04 of the Disclosure Schedules as follows: (i) At Closing, $525,000 by wire of immediately available funds to an account specified by Seller (the “ Seller Account ”), consisting of $350,000 (the “ Closing Payment ”) and the Buyer Deposit; and (ii) On the date that is thirty calendar days after the Closing, $175,000 (the “ Post-Closing Payment ”) by wire of immediately available funds to the Seller Account.
See §1.04(b); agreement dated Aug. 30, 2024
The American Brewing agreement secured the seller's obligation to refund the buyer's advance deposit with equipment finance agreements until the deposit was returned or applied at closing.
At the time of delivery of the Advance Deposit, and until its return upon termination of this Agreement or application to the Purchase Price at the Closing, Seller's obligation to refund the Advance Deposit shall be evidenced and secured by the Equipment Finance Agreements in the form attached hereto as Exhibit C (the "Interim Finance Documents").
See §2.06; agreement dated Sept. 30, 2015
The American Brewing agreement returned the advance deposit to the buyer if the closing conditions were not satisfied by the outside date despite the buyer's good-faith efforts and the parties did not agree to extend it.
The Advance Deposit shall be returned to Buyer if, notwithstanding Buyer's good faith efforts to satisfy the conditions to closing, they have not been satisfied by the Outside Termination Date and the parties do not mutually agree to extend such date.
See §2.06; agreement dated Sept. 30, 2015
The ECOtality agreement let the sellers keep the good faith deposit as a credit at closing or on termination under its section 9.01(b), and otherwise returned it to the buyer after termination subject to setoff for the buyer's breach.
The Good Faith Deposit shall be retained by the Sellers in the following circumstances: (i) at the Closing as a credit against the Purchase Price and (ii) if this Agreement is terminated pursuant to Section 9.01(b). Except as described in the previous sentence, the Good Faith Deposit shall be returned to Buyer after termination of this Agreement subject to any setoff for any claim of breach or payment due for breach by Buyer of this Agreement.
See §2.06(b); agreement dated Oct. 10, 2013
The ECOtality agreement's section 9.01(b) let the sellers terminate before closing if the buyer materially breached a representation or failed to perform its pre-closing covenants, and section 9.01(e) tied another termination right to a bankruptcy court approval order.
This Agreement may be terminated at any time prior to the Closing: (a) by mutual written agreement of the Sellers and Buyer; (b) by the Sellers, if Buyer has breached any representation or warranty of Buyer contained in this Agreement in any material respect, or if Buyer shall fail to perform or comply in all material respects with all covenants and obligations of Buyer under this Agreement to be performed or complied with by it on or prior to the Closing Date; provided, that Sellers are not then in material breach of their representations, warranties, covenants or obligations under this Agreement; (c) by the Sellers, if any condition to the obligations of Sellers set forth in Section 6.01 (c) or (d) shall have become incapable of fulfillment; provided, that Sellers are not then in material breach of their representations, warranties, covenants or obligations under this Agreement; (d) by the Buyer, if any condition to the obligation of Buyer set forth in Section 6.02 shall have become incapable of fulfillment; provided, that Buyer is not then in material breach of its representations, warranties, covenants or obligations under this Agreement; (e) by either the Sellers or Buyer, if the Closing shall not have been consummated on or before the date that is two (2) Business Days after the entry of the Approval Order by the Bankruptcy Court, unless the party seeking termination is in material breach of its representations, warranties, covenants or obligations under this Agreement.
See §9.01; agreement dated Oct. 10, 2013
California Civil Code § 1671(b) makes a contract provision liquidating damages for breach valid unless the challenger shows it was unreasonable under the circumstances when the contract was made, except in the cases subdivision (c) sends to subdivision (d).
(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
See Cal. Civ. Code § 1671(b).
Anthony Wilkinson explains that the choice of who holds the deposit can affect how the process unfolds, particularly when communication or timing becomes important.
The choice of who holds the deposit can affect how the process unfolds, particularly when communication or timing becomes important.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson explains that what happens to an escrowed deposit depends on how the agreement addresses closing, termination or buyer default.
The answer depends on how the asset purchase agreement addresses closing, termination, or buyer default.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson advises that the agreement clearly define the situations in which the buyer may recover the deposit.
The agreement should clearly define the situations in which the buyer may recover the earnest money deposit.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson explains that a seller may be entitled to keep the deposit if the buyer refuses to close after the agreement's conditions have been satisfied.
You may be entitled to keep the earnest money deposit if the buyer refuses to close after the conditions of the asset purchase agreement have been satisfied.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson explains that an agreement may let the seller retain the deposit as liquidated damages if the buyer defaults.
The agreement may state that if the buyer defaults, the seller may retain the earnest money deposit as liquidated damages.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Anthony Wilkinson estimates that the deposit in many business transactions ranges from about 1 to 10 percent of the purchase price, varying with transaction size, risk and competition for buyers.
In many business transactions, the earnest money deposit ranges from about 1 percent to 10 percent of the purchase price, although the amount of earnest money varies depending on the size of the transaction, the level of risk, and how competitive the market is for potential buyers.
See Anthony Wilkinson, What Is Earnest Money? Does Your Asset Purchase Agreement Include a Refundable Deposit?, Wilkinson Law (Mar. 20, 2026).
Should part of the purchase price be paid after closing?
Paying part of the price after closing suits a deal in which the buyer wants security for claims that may surface later, since, as Conor Meyers observes, an unsecured indemnity from an individual seller who has spent the proceeds is worth far less than its face value. A holdback, however, leaves the seller carrying the risk that the buyer cannot pay when the holdback falls due.
The forms differ mainly in who holds the money and what it secures: an escrow, for example, places part of the price with a third party, usually a bank or a law firm, until contractual obligations are met or as security for the seller's representations and warranties. The table compares the main forms:
| Form | Who holds the money until it is paid | Risk each side keeps |
|---|---|---|
| Escrow | A third-party escrow agent under an escrow agreement. | The seller waits for release. |
| Holdback | The buyer, with no third-party agent. | The seller bears the buyer's credit risk. |
| Fixed deferred payment | The buyer, until the agreed date. | The seller waits for payment until the agreed date. |
| Seller note | The buyer, which owes the balance under a promissory note that may be secured by the purchased assets. | A senior lender may require the seller's note to be subordinated. |
One filed product-line sale held back $320,000 of the closing price for twelve months, subject to reduction under its indemnity article. A $700,000 e-commerce asset purchase deferred $175,000 of the price to thirty days after closing. A larger transaction held its escrow amount as security for the seller's indemnification obligations. An online-business sale run through a broker gave the buyer fourteen days after migration to inspect the assets before the price was released. These are examples of negotiated terms; Wright Lewis estimates that around 10 to 25 percent of the price is typically held back or placed in escrow, a practitioner's estimate rather than a measured survey.
The amount of an indemnity holdback is usually based on a percentage of the price, though it may be increased for a specific known risk of an indemnity claim. The holdback period depends largely on the survival periods for indemnity claims, and a seller may negotiate release in stages over the holdback or escrow period. The parties also decide what the reserve secures: buyers generally prefer one escrow for indemnity claims and price adjustments so that more funds are available, while sellers prefer separate accounts that isolate their exposure and allow separate release dates. A reserve can also secure a specific tax obligation: in California, a buyer of a business must withhold enough of the price to cover the seller's sales or use tax until the seller produces a receipt showing payment or a certificate that nothing is due, as the successor-liability question explains.
A seller note has its own tradeoffs, and when a bank or SBA loan also finances the purchase, Andrew Elkhoury observes that the lender will almost always require the seller note to be subordinated to its senior debt. A note or earnout gives the buyer something to set claims off against, which makes an escrow less important to the buyer, but setoff against a note is less useful than cash when a large loss arises. An express setoff right can be drafted to fit the note: one filed agreement let the buyers set off indemnity claims against amounts payable under the seller's convertible note even if disputed, and provided that a good-faith setoff, whether or not ultimately justified, would not be an event of default under the notes. Another filed agreement allowed setoff against the seller's note only for amounts the seller agreed were due or a court had adjudged. A deposit paid at signing is a separate term that protects the seller before closing.
Sources for this answer
Wright Lewis explains that a holdback serves the same purpose as an escrow without a third-party escrow agent holding the funds.
A holdback has essentially the same purpose as an escrow, except that there is no third party escrow agent holding the funds.
See Wright Lewis, Earnouts, Escrows, and Holdbacks: Alternative Payment Options for Structuring Your Next Business Purchase Deal, Dunlap Bennett & Ludwig (May 23, 2024).
Conor Meyers observes that an unsecured indemnity from an individual seller who has spent the proceeds is worth far less than its face value.
Where the seller is an individual who will have spent the proceeds, an unsecured indemnity is worth far less than its face value.
See Conor Meyers, Reps and Warranties in a Business Sale, Clark Meyers (Aug. 21, 2026).
Wright Lewis identifies the seller’s credit risk that the buyer cannot pay a holdback when due.
A disadvantage is the credit risk to the seller, in that the buyer may not be able to make the holdback payment when it’s due because they don’t have the money.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
The SofTech agreement held back $320,000 of the closing price for twelve months, subject to reduction under its indemnity article.
The US$320,000 balance of the Closing Purchase Price (“Holdback”) shall be payable to Seller, subject to possible reduction or deferred payment under Article V of this Agreement, by wire transfer twelve months after the Closing Date (“Holdback Period”).
See §1.4.2; agreement dated Aug. 30, 2013
The iGourmet agreement deferred $175,000 of its price to thirty days after closing.
(ii) On the date that is thirty calendar days after the Closing, $175,000 (the “ Post-Closing Payment ”) by wire of immediately available funds to the Seller Account.
See §1.04(b)(ii); agreement dated Aug. 30, 2024
The Luna agreement held its escrow amount as security for the seller’s indemnification obligations.
The Escrow Amount delivered by Buyer at Closing pursuant to the Escrow Agreement shall be held in an escrow account and shall serve as security for payment of any indemnification obligations of Seller (the “Escrow Fund”).
See §2.10
The Jeffs Brands agreement gave the buyer fourteen days after migration to inspect the assets before release of the price.
Buyer shall have a period of fourteen (14) days from the Completed Migration to fully inspect the Assets (“Inspection Period”) upon the following terms and conditions: (a) During the Inspection Period, Buyer shall operate the Assets in a manner as close as possible to Seller’s operation and shall not make any material changes, including addition of new expenses, without Seller’s prior written consent.
See Inspection Period, ¶8
Schwabe explains that the holdback period largely depends on the survival periods for indemnity claims.
The length of the holdback period will depend largely on the length of the survival periods for the indemnity claims.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Wright Lewis suggests that a seller may negotiate release of an escrow or holdback in stages.
It may be beneficial for a seller to negotiate a graduated release schedule, where a percentage of the escrow or holdback will be released to the seller at multiple intervals throughout the escrow or holdback period.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
Imke Ratschko describes installment payments documented by a buyer promissory note, possibly secured by the purchased assets.
If there are installments, the purchaser would usually give a promissory note for that amount and may give a security interest in the purchased assets, in case the purchaser defaults under the promissory note.
See Imke Ratschko, The Basics of an Asset Purchase Agreement, Ratschko PLLC (July 25, 2022; updated July 28, 2022).
Andrew Elkhoury observes that a bank or SBA lender will almost always require the seller note to be subordinated to senior debt.
When bank or SBA loans are involved, the institutional lender will almost always require that the seller note be subordinated to the senior debt.
See Andrew Elkhoury, Seller Financing in Business Acquisitions: Legal Structuring & Negotiation Guide for Deals, Elkhoury Law (Dec. 19, 2025).
Wright Lewis explains that a promissory note or earnout makes an escrow less important to the buyer because the balance can be reduced.
If there is any form of deferred purchase price (like a promissory note or an earnout), an escrow or holdback is not quite as important to the buyer because the note balance can always be reduced.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
Wright Lewis cautions that setoff against a note is less helpful to the buyer than cash when a significant indemnifiable loss arises.
However, if a significant cost arises as a result of an indemnifiable loss, setting off against a note is not as helpful to the buyer as cash.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
Wright Lewis describes an escrow as part of the price held by a third party, usually a bank or a law firm, until contractual obligations are met or as security for the seller's representations and warranties.
An escrow is where part of the purchase price is held by a third party (usually a bank or a law firm) until certain contractual obligations are met, or as security for the seller’s representations and warranties.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
Wright Lewis estimates that around 10 to 25 percent of the purchase price is typically held back or placed in escrow.
Typically, around 10-25 percent of the total purchase price will be held back or placed in escrow.
See Wright Lewis, Earnouts, Escrows, and Holdbacks, Dunlap Bennett & Ludwig (May 23, 2024).
Schwabe explains that the holdback amount is usually based on a percentage of the price but may be increased for a specific known risk of an indemnity claim.
The first consideration for an indemnity holdback is determining the amount. This is usually based on a percentage of the purchase price, but the amount may be increased if there is a specific known risk of an indemnity claim.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Schwabe explains that buyers generally prefer one escrow for indemnity and adjustment obligations so more funds are available, while sellers prefer separate holdback accounts to isolate exposure and allow separate release dates.
Buyers generally prefer one escrow account so that more funds are available to satisfy potential seller obligations, whereas sellers prefer separate hold back accounts to isolate exposure of the holdback amount and provide for separate escrow release dates.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
California requires a buyer of a business or stock of goods to withhold enough of the price to cover the seller's sales or use tax until the seller produces a receipt or no-tax-due certificate.
If any person liable for any amount under this part sells out his business or stock of goods or quits the business, his successors or assigns shall withhold sufficient of the purchase price to cover such amount until the former owner produces a receipt from the board showing that it has been paid or a certificate stating that no amount is due.
See Cal. Rev. & Tax. Code § 6811.
The Grove agreement let the buying parties set off indemnity amounts against the seller's convertible note even if disputed, and provided that a good-faith setoff would not be an event of default under the notes.
Upon notice to Seller from either Buying Party specifying in reasonable detail the basis therefor, Buying Parties may withhold and set off any amount to which they may be entitled under this Section 7 (or any other agreement entered into pursuant to this Agreement, or otherwise) against the Seller or any of the Selling Parties against amounts otherwise payable under the Convertible Note, regardless of whether any Selling Party disputes such setoff claim, or whether such setoff claim is for a contingent or an unliquidated amount. The exercise of such right of setoff by a Buying Party in good faith, whether or not ultimately determined to be justified, will not constitute an event of default under the Promissory Note or Convertible Note.
See §7.7
The Salem agreement allowed the buyer to set off indemnity amounts against amounts payable to the seller, including under the note, only if the seller agreed the amount was due or a court judgment found the seller owed it.
Upon notice to Seller specifying in reasonable detail the basis therefore, Buyer may set off any amount to which it may be entitled under this Article IX against amounts otherwise payable to Seller, including without limitation under the Note, provided that Seller has agreed that such amount is due to Buyer or a judgment has been rendered by a court with appropriate jurisdiction that Seller owes such amount.
See §9.7
Should the price adjust for inventory or prepaid customer obligations at closing?
For inventory, one approach to a closing price adjustment, as Barlow & Williams describe it, states an assumed inventory amount in the asset purchase agreement and then changes the price at closing for the difference between that amount and the actual inventory value shown by an inventory report. On a touch screen, a tap shows all 2 sources in this group.
An adjustment accounts for changes in the business's financial condition between signing and closing, and the need is especially acute when several months pass between signing and closing, as when closing awaits regulatory or third-party approvals. For an e-commerce or other product business, the parties may agree to value inventory before closing to determine the final price. Prepaid customer obligations are the mirror image, because they are liabilities the buyer takes on; Barlow & Williams advise that a seller with many prepaid annual subscriptions should expect the buyer to ask for a price reduction for those ongoing liabilities. One filed agreement for an online-service business subtracted customers' deferred revenue from the price, and a filed e-commerce agreement adjusted its deferred payment for revenue the seller received before closing on orders the buyer fulfilled afterward. The customer-obligations question covers how to allocate those obligations.
Specifying the procedures for determining the adjustment as precisely as possible reduces the risk of a dispute, and Barlow & Williams describe a seller review period for the closing statement that is commonly 30 days and may be shorter in smaller transactions. The measurement need not happen at the moment of closing, but there does need to be an exact time. Normally the buyer prepares the closing statement supporting the adjustment, and the clause should specify which accounting principles apply. Referring a dispute to an independent accountant is one option; one filed agreement limited the accountant's determination to the range between the parties' positions.
A working-capital adjustment of the kind used in larger acquisitions measures current assets such as receivables and inventory against current liabilities; one larger filed agreement defined net working capital that way, excluding assets and liabilities that did not transfer. Many small online businesses have little of that to measure: most software-as-a-service and e-commerce businesses do not have accounts receivable, while businesses on deferred payment terms may see adjustments based on the buyer's ability to collect.
A deferred payment can be the source of payment for an adjustment owed to the buyer: the buyer may demand that part of the price be escrowed so that the seller has funds to pay it, and one filed agreement made the seller's convertible note subject to offset for a negative working-capital adjustment. An adjustment also changes the tax allocation, because an increase or decrease in consideration after the purchase date must be allocated among the assets.
Sources for this answer
Barlow & Williams recommend stating an assumed inventory amount explicitly in the asset purchase agreement.
To account for this, a certain amount of inventory is assumed in the asset purchase agreement and should be stated explicitly.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Barlow & Williams describe changing the price at closing for the difference between the assumed and actual inventory value.
Then at closing, the parties run an inventory report and the purchase price is changed to reflect the discrepancy between the assumed value of the inventory in the asset purchase agreement and the actual value of the business’s inventory at closing.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Imke Ratschko describes a pre-closing inventory valuation to finally determine the price.
Seller and purchaser may be obligated prior to closing to conduct a valuation of inventory in order to finally determine the purchase price.
See Imke Ratschko, The Basics of an Asset Purchase Agreement, Ratschko PLLC (July 25, 2022; updated July 28, 2022).
The Sitestar agreement subtracted customers’ deferred revenue from the purchase price.
Deferred Revenue for these customers shall be subtracted from the Purchase Price.
See §4.3(a); agreement dated Feb. 28, 2007
The iGourmet agreement adjusted its post-closing payment for pre-closing revenue on orders the buyer fulfilled after closing.
The Post-Closing Payment shall be further adjusted to reflect credits or debits to the parties resulting from revenues received by the Seller prior to the date of Closing for order fulfillment by the Buyer after the date of Closing.
See §1.04(c); agreement dated Aug. 30, 2024
Barlow & Williams recommend specifying the procedures for determining a price adjustment as precisely as possible to mitigate the risk of a dispute.
To mitigate this risk, the parties should be as specific as possible in detailing the procedures to determine any purchase price adjustment.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Barlow & Williams describe a seller review period for the closing statement, commonly 30 days and possibly shorter in smaller transactions.
After the closing statement is sent to the seller, the seller will have a period of time (30 days is common but this could be less in smaller transactions) to review it.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
The Bankrate agreement limited the accountant’s determination of disputed earnout amounts to the range of the parties’ positions.
Any determination by the Accountant shall not be outside the range defined by the respective amounts in such Earnout Statement proposed by Buyer and Seller’s proposed adjustments thereto set forth in the Earnout Protest Notice, and absent manifest mathematical error such determination shall be final, binding and non-appealable by the Parties.
See §2.6(b)
The Luna agreement defined net working capital as the seller's receivables, inventory, prepaid expenses and other current assets, other than excluded assets, less current liabilities and excluding retained liabilities.
“Net Working Capital” means, as of the Closing, (a) the sum of accounts receivable, Inventory and prepaid expenses and other current assets of the Seller, other than any Excluded Assets, less (b) Current Liabilities and excluding any Retained Liabilities.
See §1.1, definition of Net Working Capital
Schwabe describes post-closing adjustments as increases or reductions to the price to account for changes in the company's financial condition between signing and closing.
Finally, post-closing adjustments to the purchase price are increases or reductions to the purchase price to account for changes in the company’s financial condition between signing and closing.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Schwabe explains that the need for a post-closing adjustment is especially acute when several months pass between signing and closing, such as while awaiting regulatory or third-party approvals.
The need for post-closing adjustment can be especially acute when there has been a delay of several months between signing and closing, such as may occur when closing is delayed due to awaiting regulatory or third party approvals for closing.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Barlow & Williams advise that sellers with many prepaid annual subscriptions should be prepared for the buyer to ask for a price reduction for the ongoing liabilities it assumes.
If there are lots of prepaid annual subscriptions, sellers should be prepared for the buyer to ask for a reduction in purchase price to account for the ongoing operating liabilities the buyer is assuming.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Barlow & Williams explain that the adjustment need not be measured at the moment of closing but must be measured at an exact time.
It doesn’t have to be the moment of closing, but there does need to be an exact time.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Barlow & Williams explain that the buyer normally prepares the closing statement supporting a price adjustment.
Normally, the buyer will be the one who prepares the paperwork supporting any purchase price adjustment (this is referred to as a closing statement).
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Schwabe advises that post-closing adjustment provisions specify the accounting principles that will apply.
In drafting the post-closing adjustment provisions, the parties should specify what accounting principles will apply.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Barlow & Williams observe that most SaaS and e-commerce businesses do not have accounts receivable, while businesses on deferred payment terms may see adjustments based on collections.
Most SaaS and Ecommerce businesses don’t have accounts receivable, but businesses that operate on deferred payment terms may see purchase price adjustments based on the buyer’s ability to collect on those outstanding payments as they become due.
See Barlow & Williams, Purchase Price Adjustments (May 17, 2024).
Schwabe explains that the buyer may demand that part of the price be escrowed so the seller has funds to pay any post-closing adjustment owed to the buyer.
In either case, the buyer may demand that a portion of the purchase price be put into escrow to ensure that the seller has funds available to pay any post-closing adjustment amount owed to buyer.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
The Grove agreement made the seller's convertible note subject to offset for amounts the seller owed because of a negative net working capital adjustment.
The Convertible Note shall be subject to offset for any amounts that Seller owes to Buyer arising from a reduction in Purchase Price due to a negative NWC Adjustment Amount.
See §2.4(c)
IRS Form 8594 instructions require the seller or purchaser to allocate among the assets an increase or decrease in consideration that occurs after the purchase date and changes the amount realized or cost basis.
If an increase or decrease in consideration that must be taken into account to redetermine the seller's amount realized on the sale, or the purchaser's cost basis in the assets, occurs after the purchase date, the seller and/or purchaser must allocate the increase or decrease among the assets.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Reallocation after an increase or decrease in consideration.
Should part of the price depend on future performance?
If the parties choose an earnout, the agreement can give the seller a way to verify the payment, as one filed asset purchase agreement did by giving the seller and its accountants reasonable access to the buyer's books, records, workpapers and personnel to verify the earnout calculation.
An earnout, an indemnity holdback and a closing adjustment each provide a way to adjust the price to reflect the business's value more accurately, but they respond to different events. An earnout provides for an upward adjustment based on the business's performance after closing. An indemnity holdback temporarily reduces the amount paid at closing and is held in escrow to cover the seller's indemnity obligations. A closing adjustment accounts for changes in the business's financial condition between signing and closing. The deferred-payment question and the closing-adjustment question cover the other two mechanisms.
Andrew J. Schultheis and Dylan Lowe describe earnouts as among the most frequently litigated provisions in acquisitions. In their account, a well-drafted earnout addresses how performance is measured, how payments are made, how the seller's interests are protected during the earnout period and how disputes are resolved, with the accounting standards, measurement periods and any inclusions or exclusions defined clearly. They explain that sellers often prefer revenue metrics because a buyer can less easily reduce revenue through spending decisions or expense allocations, and recommend that sellers seek at least a covenant to operate the business in the ordinary course, while buyers want flexibility to run and integrate the business. If the parties cannot agree the calculation, an independent accountant can decide; one filed agreement limited that determination to the range between the parties' positions. Schultheis and Lowe report that earnout periods commonly range from one to three years, a practitioners' estimate rather than a measured survey; this guide supplies no amount, target, period or performance guarantee.
Sources for this answer
The Bankrate agreement supports access to the identified records and personnel to verify its earnout calculation.
Upon receipt of an Earnout Statement, Seller and its accountants will be given reasonable access upon reasonable notice to Buyer’s relevant books, records, workpapers and personnel during business hours for the purpose of verifying the Earnout Adjusted EBITDA and Reference Adjusted EBITDA and the resulting Earnout Amount.
See §2.6(b)(i)
Andrew J. Schultheis and Dylan Lowe describe earnouts as among the most frequently litigated M&A provisions.
While earnouts can be an effective tool for getting deals done, they are also one of the most frequently litigated provisions in M&A transactions.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
Andrew J. Schultheis and Dylan Lowe explain that sellers often prefer revenue metrics because a buyer can less easily reduce revenue through spending decisions or expense allocations.
For that reason, sellers often prefer revenue as the earnout metric because it is harder for a buyer to decrease through discretionary spending decisions or expense allocations.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
Andrew J. Schultheis and Dylan Lowe recommend that sellers seek at least an ordinary-course operating covenant.
At a minimum, sellers should seek a covenant requiring the buyer to operate the business in the ordinary course consistent with past practices.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
Andrew J. Schultheis and Dylan Lowe explain that buyers want flexibility to operate and integrate the acquired business.
Buyers, on the other hand, will want flexibility to operate the acquired business as they see fit and to integrate it into their broader operations.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
The Bankrate agreement limited the accountant’s determination of disputed earnout amounts to the range of the parties’ positions.
Any determination by the Accountant shall not be outside the range defined by the respective amounts in such Earnout Statement proposed by Buyer and Seller’s proposed adjustments thereto set forth in the Earnout Protest Notice, and absent manifest mathematical error such determination shall be final, binding and non-appealable by the Parties.
See §2.6(b)
Schwabe describes earn-outs, indemnity holdbacks and post-closing adjustments as mechanisms for adjusting the purchase price to reflect the company's value more accurately.
The three concepts discussed in this article – earn-outs, indemnity holdbacks, and post-closing adjustments – are each mechanisms in a sale of the stock or assets of a company that provide a means for adjusting the purchase price to more accurately reflect the company’s value.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Schwabe describes earn-outs as providing upward adjustment based on the company's post-closing performance.
Earn-outs provide for upward adjustment based on positive performance by the company post-closing.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Schwabe describes an indemnity holdback as a temporary reduction in the price paid at closing, held in escrow to cover the seller's indemnity obligations.
Indemnity holdbacks are a temporary reduction in the amount of purchase price paid to the seller at closing, held in escrow to be drawn upon to cover seller’s indemnity obligations to the buyer, thereby reducing the purchase price.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Schwabe describes post-closing adjustments as increases or reductions to the price to account for changes in the company's financial condition between signing and closing.
Finally, post-closing adjustments to the purchase price are increases or reductions to the purchase price to account for changes in the company’s financial condition between signing and closing.
See Schwabe, Williamson & Wyatt, Getting the Purchase Price Right: Earn-outs, Escrows, and Post-Closing Adjustments in M&A Transactions (Nov. 22, 2016).
Andrew J. Schultheis and Dylan Lowe say a well-drafted earnout provision addresses how performance is measured, how payments are made, how the seller's interests are protected and how disputes are resolved.
A well-drafted earnout provision should address four key areas: how performance is measured, how payments are made, how the seller's interests are protected during the earnout period, and how disputes are resolved.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
Andrew J. Schultheis and Dylan Lowe advise that an earnout provision clearly define the accounting standards, measurement periods and any inclusions or exclusions from the calculation.
Regardless of which metric or milestone is chosen, the earnout provision should clearly define the applicable accounting standards (e.g., GAAP applied consistently with the target company's historical practices), the measurement periods, and any specific inclusions or exclusions from the calculation.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
Andrew J. Schultheis and Dylan Lowe report that earnout periods commonly range from one to three years.
Timing considerations include when the earnout period begins (typically at closing), how long it lasts (earnout periods commonly range from one to three years), and when payments are due after each measurement period ends.
See Andrew J. Schultheis and Dylan Lowe, Earnouts in Mergers and Acquisitions Deals, Davis Wright Tremaine (June 2026).
How does the purchase-price allocation affect each side's taxes?
The purchase-price allocation sets the buyer's tax basis in each acquired asset, which governs the buyer's later deductions such as the 15-year amortization of goodwill and other section 197 intangibles, and sets the seller's gain or loss on each asset transferred. On a touch screen, a tap shows all 3 sources in this group.
For the buyer, a covenant not to compete entered into in connection with the acquisition of a trade or business is a section 197 intangible, like goodwill, and an amortizable section 197 intangible is amortized ratably over 15 years, subject to the section's eligibility conditions and exceptions. Software has its own exception: section 197 excludes computer software that is readily available to the general public, nonexclusively licensed and not substantially modified, and other software not acquired in a transaction involving the acquisition of a trade or business.
For the seller, each asset in the sale of a business is generally treated as sold separately, and the sale of inventory results in ordinary income or loss while the sale of capital assets results in capital gain or loss. The Internal Revenue Code excludes inventory and property held primarily for sale to customers from the definition of a capital asset.
The parties cannot allocate freely: under the IRS instructions, the amount allocated to an asset other than a Class VII asset cannot exceed its fair market value on the purchase date, and Class VII assets are goodwill and going concern value.
Whether an allocation must be reported depends on the transaction: the IRS instructions require both the seller and the purchaser of a group of assets that makes up a trade or business to use Form 8594 if goodwill or going concern value attaches, or could attach, and the purchaser's basis is determined only by the amount paid. The instructions also list exceptions, including an exchange of the group of assets for like-kind property under section 1031 and the transfer of a partnership interest.
For an applicable asset acquisition, the Internal Revenue Code makes a written agreement between buyer and seller on the allocation, or on the fair market value of any asset, binding on both of them unless the IRS determines that it is not appropriate. An agreement can therefore set a process for agreeing the allocation, as one filed brewery sale did by having the buyer prepare an allocation schedule before closing in accordance with IRS pronouncements. It can also commit both parties to report consistently: another filed agreement required each party to file its returns on the basis of the agreed allocation, barred any inconsistent return position and required each party to use the allocation for its Form 8594. A later increase or decrease in consideration that changes the seller's amount realized or the purchaser's basis must itself be allocated among the assets, and if the amount allocated to any asset increases or decreases after the year of the sale, the affected party files a supplemental Form 8594 with the return for the year in which the change is taken into account.
The tax advisers determine applicability and reconcile the allocation, payment structure and reporting responsibilities with the agreement, and this guide supplies no preferred allocation or nationwide tax solution.
Transfer taxes are a separate economic choice that the agreement can allocate: one filed agreement made the buyer bear all sales, value added, use, transfer, registration, stamp and similar taxes imposed in connection with the sale. Tax clearance for the seller's unpaid sales taxes is addressed under successor liability.
Sources for this answer
IRS Form 8594 instructions support allocating the purchase price to determine the purchaser's basis and the seller's gain or loss for the transferred assets.
An allocation of the purchase price must be made to determine the purchaser's basis in each acquired asset and the seller's gain or loss on the transfer of each asset.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Purpose of Form; Allocation of consideration (accessed Sept. 28, 2026).
IRS Form 8594 instructions support reporting by both parties when the described trade-or-business asset acquisition and basis conditions are met.
Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Purpose of Form (accessed Sept. 28, 2026).
IRS Form 8594 instructions state that the amount allocated to an asset other than a Class VII asset cannot exceed its fair market value on the purchase date.
The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Allocation of consideration.
IRS Form 8594 instructions define Class VII assets as goodwill and going concern value.
Class VII assets are goodwill and going concern value (whether or not the goodwill or going concern value qualifies as a section 197 intangible).
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Classes of assets.
IRS Form 8594 instructions require the affected seller or purchaser to file a supplemental Form 8594 for the year in which a later increase or decrease in an asset's allocation is taken into account.
If the amount allocated to any asset is increased or decreased after the year in which the sale occurs, the seller and/or purchaser (whoever is affected) must complete Parts I and III of Form 8594 and attach the form to the income tax return for the year in which the increase or decrease is taken into account.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, When To File.
A written agreement between transferee and transferor on allocation or fair market value in an applicable asset acquisition binds both unless the IRS determines it is not appropriate.
If in connection with an applicable asset acquisition, the transferee and transferor agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, such agreement shall be binding on both the transferee and transferor unless the Secretary determines that such allocation (or fair market value) is not appropriate.
See 26 U.S.C. § 1060(a).
Section 197 intangibles include goodwill, going-concern value and a covenant not to compete entered into in connection with acquiring an interest in a trade or business.
(1) In general Except as otherwise provided in this section, the term "section 197 intangible" means- (A) goodwill, (B) going concern value, (C) any of the following intangible items: (i) workforce in place including its composition and terms and conditions (contractual or otherwise) of its employment, (ii) business books and records, operating systems, or any other information base (including lists or other information with respect to current or prospective customers), (iii) any patent, copyright, formula, process, design, pattern, knowhow, format, or other similar item, (iv) any customer-based intangible, (v) any supplier-based intangible, and (vi) any other similar item, (D) any license, permit, or other right granted by a governmental unit or an agency or instrumentality thereof, (E) any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business or substantial portion thereof, and (F) any franchise, trademark, or trade name.
See 26 U.S.C. § 197(d)(1).
Amortizable section 197 intangibles are amortized ratably over 15 years beginning with the month of acquisition.
A taxpayer shall be entitled to an amortization deduction with respect to any amortizable section 197 intangible. The amount of such deduction shall be determined by amortizing the adjusted basis (for purposes of determining gain) of such intangible ratably over the 15-year period beginning with the month in which such intangible was acquired.
See 26 U.S.C. § 197(a).
26 U.S.C. § 1221(a)(1) excludes stock in trade, inventory and property held primarily for sale to customers in the ordinary course of business from the definition of a capital asset.
For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include- (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
See 26 U.S.C. § 1221(a)(1).
The American Brewing agreement allocated the purchase price among the purchased assets for tax and accounting purposes as shown on an allocation schedule the buyer prepared before closing in accordance with IRS pronouncements.
Seller and Buyer agree that the Purchase Price shall be allocated among the Purchased Assets for all purposes (including Tax and financial accounting) as shown on an allocation schedule (the " Allocation Schedule ") to be prepared by Buyer prior to the Closing Date in accordance with IRS pronouncements.
See §2.07; agreement dated Sept. 30, 2015
Section 197 intangibles exclude computer software that is readily available to the general public, nonexclusively licensed and not substantially modified, and other computer software not acquired in a transaction involving the acquisition of assets constituting a trade or business.
(e) Exceptions For purposes of this section, the term "section 197 intangible" shall not include any of the following: (1) Financial interests Any interest- (A) in a corporation, partnership, trust, or estate, or (B) under an existing futures contract, foreign currency contract, notional principal contract, or other similar financial contract. (2) Land Any interest in land. (3) Computer software (A) In general Any- (i) computer software which is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified, and (ii) other computer software which is not acquired in a transaction (or series of related transactions) involving the acquisition of assets constituting a trade or business or substantial portion thereof.
See 26 U.S.C. § 197(e)(1)–(3)(A).
IRS Publication 544 explains that in the sale of a business each asset is generally treated as sold separately, with inventory producing ordinary income or loss and capital assets producing capital gain or loss.
The sale of a business is usually not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. A business usually has many assets. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). The sale of inventory results in ordinary income or loss.
See Internal Revenue Service, Publication 544, Sales and Other Dispositions of Assets, ch. 2, Sale of a Business (accessed Sept. 30, 2026).
IRS Form 8594 instructions list exceptions to filing, including a like-kind exchange of the group of assets under section 1031 and the transfer of a partnership interest.
You are not required to file Form 8594 if any of the following apply. A group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section 1031 applies. If section 1031 does not apply to all the assets transferred, however, Form 8594 is required for the part of the group of assets to which section 1031 does not apply. For information about such a transaction, see Regulations sections 1.1031(j)-1(b) and 1.1060-1(b)(8). A partnership interest is transferred.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Who Must File, Exceptions.
The Sitestar agreement required each party to file its tax returns on the basis of the agreed allocation, barred inconsistent return positions and required each party to use the allocation as the basis for its Form 8594.
Each Party shall file its respective income tax returns on the basis of the allocations agreed upon , and no Party shall thereafter take a return position inconsistent with such allocation. Each Party shall fully comply with the reporting requirements of Section 1060 of the Code relating to allocation rules for certain asset acquisitions, and will use this allocation as the basis for completing IRS Form 8594, which the Parties shall each file with the IRS on a timely basis.
See §4.3(d); agreement dated Feb. 28, 2007
IRS Form 8594 instructions require the seller or purchaser to allocate among the assets an increase or decrease in consideration that occurs after the purchase date and changes the amount realized or cost basis.
If an increase or decrease in consideration that must be taken into account to redetermine the seller's amount realized on the sale, or the purchaser's cost basis in the assets, occurs after the purchase date, the seller and/or purchaser must allocate the increase or decrease among the assets.
See Internal Revenue Service, Instructions for Form 8594 (rev. Nov. 2021), General Instructions, Reallocation after an increase or decrease in consideration.
The Greenfield Online agreement made the buyer bear all sales, value added, use, transfer, registration, stamp and similar taxes imposed in connection with the sale of the transferred assets.
(a) All sales, value added, use, transfer, registration, stamp and similar Taxes imposed in connection with the sale of the Transferred Assets shall be borne by Buyer.
See §5.3(a)