A bargain purchase occurs when a firm is purchased at a lower value than its fair market value. In this kind of transaction, businesses are sold mainly due to a crisis. There are other cases when a bargain purchase transaction occurs, such as in the case of a very rapid sale. In order for an acquirer to get a bargain purchase, the following steps have to be followed.
The first step is to record the assets and liabilities along with their fair values. The next step is to assess whether all of the assets and liabilities have been properly recorded. If there are other considerations that need to be paid to the owners, they also have to be recorded. If there is any difference between the consideration paid and the fair value, that has to be recorded.
How does this work? For example, business owners of ATC have to sell their business even if the price is far below market value. ATC will then be sold to BTS Industries for $6,000. The acquirer then hires a firm that will analyze and evaluate all of the assets and liabilities. After conducting the analysis, the firm has concluded that the fair value of ATC’s net assets is $9,000. By subtracting the difference, you get the gain or the bargain purchase.
The Aftermath of the 2008 Market Crash
After the market crash in 2008, there were a lot of firms that were bought at far lower than their market value. Other, more financially stable firms were able to take advantage of buying these companies.
Though there were limited amounts of bargain purchases, acquirers were able to take advantage of low bargaining power. This was brought about by unfavorable circumstances that beset the firms in question.
Read more about other types of purchases
To learn more, see the following free CFI resources: