Financial

Amortization

The systematic allocation of an intangible asset's cost over its useful life — similar to depreciation but applied to non-physical assets like patents, customer lists, and acquired goodwill.

Key Insight

After an asset acquisition, goodwill and other intangibles are amortized over 15 years — creating significant tax deductions that reduce the effective cost of the acquisition. This tax benefit is one of the primary reasons buyers prefer asset sales.

Post-Acquisition Amortization

Under Section 197 of the Internal Revenue Code, most intangible assets acquired in an asset purchase (or a 338(h)(10) election) are amortized over 15 years. This includes:

  • Goodwill
  • Customer lists
  • Non-compete agreements
  • Trade names and trademarks
  • Franchise agreements

For a business acquired at $1.2M with $800K allocated to intangibles: $800K ÷ 15 years = $53,333/year in amortization deductions. At a 35% effective tax rate, that's approximately $18,700/year in tax savings — roughly $280K in present value over 15 years.

Amortization in EBITDA Calculation

EBITDA adds back both depreciation and amortization (hence "DA"). Post-acquisition amortization is purely an accounting entry with no cash equivalent — it reflects the allocated purchase price, not an ongoing operational cost.

In normalized financial statements, pre-acquisition amortization (from the seller's prior acquisitions or intangible assets) is also typically added back.

Loan Amortization

Separately, "amortization" also refers to the repayment of loan principal over time — each loan payment includes interest and principal repayment (amortization). A fully amortizing SBA loan pays off the full balance by the maturity date; a non-amortizing or interest-only loan does not.

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