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Wednesday, November 3, 2010

Purchase of a Business by a Limited Company

Several advantages may stem from the “conversion” of a private business into a limited company e g perpetual succession, whereby a member of a company can transfer his shares, or bequeath them by will at death, without describing the constitution of the company or its financial resources.

The “conversion” may take the from of the transfer to a private company of the assets and goodwill of the business in consideration of the allotment of shares in the company, which the sellers of the business will continue to hold, and through which they will retain the control of the business. Alternatively, a public company may be formed to acquire the business; a promoter or syndicate purchases the business from the original owners, and resells it to the company at a profit, the capital of the company being raised by public subscriptions. Or a public company may be formed to take over the business of a private company, the shareholders of the private company receiving shares or other interests in the public company in exchange for their existing holdings.

Accounting entries in the purchasing company’s books

In the purchasing company’s books, the assets acquired must be debited at acquisition values, which are often different from the book values shown in the vendors business’s books; when a business is hold, assets are frequently revalued. Sometimes the purchasing company assumes trade liabilities as part of the purchase consideration; sometimes the company discharges the trade liabilities and collects the book debts as agent for the sellers; interest may be allowed or changed until final settlement between the purchasing company and the sellers is effected. Book debts are usually acquired at book values less an agreed provision for bad or doubtful debt; any excess received over the book values less the provision for doubtful debts is a capital profit in the purchasing company’s books.

In addition to the purchase price of the tangible assets, a further sum is usually payable for goodwill. A company making a public issue for the purchase of acquiring a business must state in the prospectus the amount of the purchase consideration attributable to goodwill.
Goodwill is the excess of the total purchase consideration over the value of the other assets acquired, less the amount of any liabilities assumed by the company.

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