. Acquisition of Business
ACQUISITION OF BUSINESS BY A LIMITED COMPANY, GENERALLY, REFERS TO THE PURCHASE OF A NON-CORPORATE BUSINESS LIKE SOLE- PROPRIETORSHIP OR PARTNERSHIP FORM OF BUSINESS BY A COMPANY. THIS DOES NOT NECESSARILY MEAN THAT A LIMITED COMPANY CANNOT ACQUIRE THE BUSINESS OF A CORPORATE BODY, I.E., ANOTHER LIMITED COMPANY. BUT STRICTLY SPEAKING, THE ACQUISITION OF BUSINESS OF A LIMITED COMPANY BY ANOTHER LIMITED COMPANY COMES UNDER THE PURVIEW OF “AMALGAMATION, ABSORPTION AND RECONSTRUCTION OF COMPANIES”. Such an acquisition of business by a limited company may take any of the following two forms:
An existing company may purchase an existing business of a sole-proprietor or a partnership firm, or
A new company may be formed to take over an existing business of a sole proprietor or a partnership firm, i.e., the existing business unit may be converted into a limited company. If the object is to retain the control of the sole-proprietor or the partners in the company, a private limited company may be formed. On the other hand, if the object of conversion is to supplement the resources for carrying out various expansion programmes, a public limited company may be formed for the purpose.
Important Points to be noted in Connection with Acquisition of a Business
1. CONSIDERATION: CONSIDERATION REFERS TO THE PRICE PAYABLE BY THE COMPANY FOR THE BUSINESS ACQUIRED. GENERALLY, AN AGREEMENT IS MADE BETWEEN THE COMPANY AND THE VENDOR CONTAINING THE TERMS AND CONDITIONS OF THE ACQUISITION OF BUSINESS, THE BASIS FOR DETERMINING THE CONSIDERATION AND THE MODE OF PAYMENT OF THE CONSIDERATION.
Consideration is usually, determined by taking into consideration the following facts:
the present value of the net tangible assets acquired, i.e., the present value of gross tangible assets acquired less liabilities, if any, acquired by the company;
the amount payable, if any, for goodwill of the business acquired; and
the liability to be taken over by the purchasing company. In case, for determining the present value of the assets, revaluation is made and the re-valued figures should be taken as their present values; otherwise, book-values should be taken. In case the business is purchased for a lump sum, the difference between the consideration to be paid and the value of net tangible assets will be the goodwill. On the other hand, if the value of net tangible assets exceeds the consideration the difference will be treated as ‘Capital Reserve’. As the terms and conditions of acquisition of business may vary in difference circumstances, the basis for determining the consideration also varies from case to case. As for example, it may so happen that only the fixed assets of an existing business may be taken over by a company or only the tangible assets may be taken over by the company or both the assets and the liabilities may be taken over by the company. However, in most of the cases, the consideration is given in the problem itself. 2. Mode of payment of the consideration by the company: After the consideration is determined, the next question that arises is how to satisfy the consideration. The consideration may be satisfied by the company in any of the following ways:
the entire consideration may be paid in cash;
the entire consideration may be paid by the issue of shares of the company;
the entire consideration may be paid by the issue of debentures of the company; or
the consideration may be paid partly in cash and partly by the issue of shares and/or debentures of the company.
Generally the last method is adopted by a company to satisfy the consideration.
It is important to note here that the shares or debentures may be issued to the vendors either at par or at a premium or at a discount.
3. Interest payable to vendors on the purchase consideration: If the...
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