Business Purchase

In: Business and Management

Submitted By Hitee
Words 1504
Pages 7
A buyer may decide to purchase a business for several reasons. They may include-

An attractive purchase price
An opportunity to expand business activities
An opportunity to acquire profit making business-
Usually the purchaser does not takeover all the assets and liabilities of the vendor (i.e.) the vendor will retain the cash and be left to pay off some or all of the liabilities.

Business Purchase price: This is the price to be given by the purchaser to the vendor. The purchaser and the vendor will calculate this price together (usually on the basis of the assets and liabilities taken over by the purchaser) or on the basis of the average profit of the business during the past years.

Calculation of Goodwill or Capital Reserves(negative goodwill): Sometimes the purchaser will have to pay for Goodwill or receive Capital Reserve. Goodwill or capital reserve is the difference between net assets and business purchase price.

Goodwill / Capital reserve = Business Purchase Price – Net Assets (Positive figure is goodwill and negative figure is capital reserve)

Factors / reasons for Good will:

A person has to pay for goodwill when taking over a business or when admitted as a partner because of

Profitability
Reputation
Locality
Public relation
Existing business means, the business is being operated and a balance sheet is there for the business at any time.

The types of business purchase can be mentioned as follows:

a) An individual (a person) purchases a business

b) A partnership or a sole trader acquires the business of a sole trader

c) Two or more sole traders join together to form a partnership

d) A limited company takes over the business of a partnership or a sole trader

Why business purchases are taking places?

a) To avoid competition ( competition will lead the business to “cutthroat” and lose)

b) To enjoy the profit of…...

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