Understandably, many buyers while doing a bit of pre-offer due diligence may check public records to see what the seller paid. But what they see may not necessarily be the price the seller paid. WHAT? WHY?
It’s because at the time of sale, the town only records what a party paid for the asset. The land and building, or the ‘real estate’. But maybe the sale included FF&E (fixtures, furniture and equipment), or goodwill (business assets such as guest database, website, trade name, etc also known as ‘intangibles’) and maybe there was a non-competition agreement they paid for. The town records only the amount allocated to real estate because that’s the asset you’re paying town property taxes on.
So here’s an example. Owner of ABC inn paid $1,000,000 when they purchased. The inn is now on the market for $1,350,000. Potential buyer looks online and sees the seller paid $855,000 when they purchased. But in fact, the seller paid $1,000,000, but the price was allocated among the assets as follows:
Building: $ 685,000
Land: $ 170,000
FF&E: $ 75,000
Goodwill: $ 50,000
Non-Comp: $ 20,000
Total: $1,000,000
This ‘allocation of assets’, as it is referred to in the purchase and sale agreement, has to be agreed to by both parties. They have to sign a form for IRS purposes as this allocation affects income tax and capital gains tax. But that’s an even bigger topic that I won’t go into now.
If you want to read my analogy of allocation of assets to a hamburger, check it out. This snapshot is taken from a delicious article in Downeast about the best burgers in Maine. I cannot argue with many of them but I must say, the smoked burger at East Ender is amazing!
At any rate, this was just to show you that what might appear to be the sale price, might not be. Now you know. Not everything is as it appears! But this BURGER is probably everything that it appears to be and MORE!
