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:

(i) 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;

(ii) the amount payable, if any, for goodwill of the business acquired; and

(iii) 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 different 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:

(i) the entire consideration may be paid in cash;

(ii) the entire consideration may be paid by the issue of shares of the company;

(iii) the entire consideration may be paid by the issue of debentures of the company; or

(iv) 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 payment of consideration to the vendors is unnecessarily delayed, the question of payment of interest to vendors for the period of the delay, naturally, arises. In such a case, the vendors can legitimately claim interest on the amount due to them for the period of delay, i.e., from the date of purchase to the date of payment. Hence, the agreement must mention about the payment of interest to vendors specifying the rate of interest.

4. Realisation expenses of the vendor borne by the purchasing company: Sometimes, the purchasing company may agree to bear the cost of realisation of the vendor and the fact must be contained in the agreement. Such expenses are to be treated as capital expenditure of the company and should be debited to Goodwill Account.

5. Whether to open a new set of books by the company on acquisition of business or to continue the books of the vendor: On acquisition of business, the company may either open a new set of books for recording its transactions or continue the same set of books of the vendor. A decision has to be taken by the company in this respect.

6. Collection of debtors and payment to creditors of the vendor on behalf of the vendor: Sometimes, the debtors and the creditors of the vendor are not taken over by the purchasing company. In such a case, the purchasing company may agree to collect the debtors of the vendor and to pay the creditors of the vendor as agent of the vendor in exchange of certain commission at fixed rate.