Purchase Price Allocation (PPA) in Tech M&A: Protecting Your Net Proceeds

In a software exit, the price on the Letter of Intent is rarely the amount that lands in your bank account. Taxes can eat up to 50% of your proceeds if the deal is structured poorly.

One of the most overlooked negotiation levers is Purchase Price Allocation (PPA). This is the process where the buyer and seller agree on how to categorize the money being paid. How you define the “assets” determines your tax bill.

The “Tax Tug-of-War”

In an asset sale, the IRS requires the purchase price to be allocated across seven asset classes (Class I through Class VII). The friction arises because Buyers and Sellers have opposing goals:

• Buyers want to allocate money to assets they can depreciate quickly (like Equipment or Software Code), giving them a tax write-off.
• Sellers want to allocate money to assets taxed at the lower Capital Gains rate (like Goodwill), rather than Ordinary Income.

The “Personal Goodwill” Strategy for Founders

For SaaS founders, the most powerful PPA strategy is arguing for Personal Goodwill.

If you built the company’s reputation, relationships, and IP yourself, we can often argue that a portion of the value belongs to you personally, not the corporation.

The Benefit: Personal Goodwill bypasses corporate taxes entirely. It is sold directly by you to the buyer, often saving millions in “double taxation” for C-Corp founders.

Common Allocation Buckets in Software Deals

• Non-Compete Agreements: Often taxed as Ordinary Income (Bad for Seller). Buyers love this bucket. We fight to minimize it.
• Consulting Agreements: Taxed as Ordinary Income/Wages (Bad for Seller).
• IP / Code Base: Taxed as Capital Gains (Good for Seller), but creates corporate tax liability.
• Goodwill: Taxed as Capital Gains (Best for Seller).

Don’t Leave Allocation for “Later”

A common mistake is signing the deal and letting the accountants handle PPA later. By then, the leverage is gone. At iMerge Advisors, we negotiate the PPA framework during the LOI stage to ensure your tax savings are locked in.

Contact our deal team to model your after-tax proceeds before you negotiate.