Purchases Of Businesses By Limited Companies ( Part 1)

(A) Basic Principles when a limited company takes over another business

(1) It can satisfies the purchase consideration by giving

• cash,
• shares or debentures
• assuming the trade liabilities
• any combination of cash, shares/debentures/assuming trade liabilities

(2)  the assets acquired are often different from the values shown in the vendor business’s book ( example : ten years ago, the vendor company bought a property for $100,000 and now the purchasing company have to buy it for $1 million)

(3)  total purchase consideration > net tangible assets of the vendor company where the excess is called goodwill and this goodwill account will appear in the purchasing company’s book

(4) total purchase consideration < net tangible assets is treated as a Capital Reserve

(B) The Purchaser (limited company) can buy:

· a sole proprietorship or

· a partnership or

· another limited company’s business