Business Purchase

Purchase of a dormant business

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I purchased a dormant company which has amounts due to directors. I paid a price higher than the assets and liabilities of the business. However, I don't believe I can capitalise the different as Goodwill and even if I could, I am not sure of the double entry, any help? this isn't an acquisition by a controlliung entity. so same business, just transferred shares but also not certain this is a case of buying shares and then paying a premium on the purchase of shares. I paid 7k for the business and the balance sheet shows 5k owned to directors. the company has 500 ordinary shares. The higher price is simply to easily obtain licenses as they already had an industry license I need.

Dr Directors Loan                                  5,000

Share premiun account                                     6500        

Profit and loss b/f                                    1500        

Replies (34)

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By David Ex
28th Aug 2023 15:24

If you have bought the shares personally then you just own shares at whatever price you paid for them.

Have the directors assigned their loans to you or are they still outstanding to the original individuals involved?

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Replying to David Ex:
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By ENJAY
28th Aug 2023 15:53

The outgoing directors' loan has been cleared through the purchase so nothing is owed to them

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paddle steamer
By DJKL
28th Aug 2023 15:29

Surely it is amounts due from directors being a DR balance?

Also Share Premium is maybe only £6,000 as share capital you state is £500 (to balance the Balance Sheet you give)

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Replying to DJKL:
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By ENJAY
28th Aug 2023 16:04

should have read owed to directors instead of "owned"

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paddle steamer
By DJKL
28th Aug 2023 15:31

"and the balance sheet shows 5k owned to directors"

Surely owed BY directors.

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By Ruddles
28th Aug 2023 15:31

No idea what your figures are supposed to indicate, but in principle it sounds as though you are actually paying £12k for the 'business'. Subject to the apparent confusion as to who owes what to whom.

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Replying to Ruddles:
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By ENJAY
28th Aug 2023 15:57

I paid 7k for the business, so the 500 shares will be simply transferred to me. The 7k cancelled the DLA owed to outgoing directors. so 5k to clear their balances (hence Dr) 500 ordinary shares remain (just ownership has changed). Issue is the reflection of the full purchase cost on the B/S. since it is the same company, just ownership has transferred and overpaid for the value of Net Assets and no goodwill can be recognised.

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Replying to ENJAY:
By Ruddles
28th Aug 2023 16:06

It might help if you could clarify exactly what the B/S looked like pre-purchase (because the figures above don't make sense). In principle, though, the only adjustment to the balance sheet would be to change the name(s) on the DLA. If the company previously owed the directors £5k it now owes you £5k. (And what you paid for the company was in fact only £2k.)

Although it is possible that the share purchase agreement did stipulate consideration of £7k to be paid for the shares. In which case the 'disposal' of the DLA would have other consequences.

Too many anomalies and unknowns.

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Replying to Ruddles:
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By ENJAY
28th Aug 2023 16:32

Thank you, I appreciate your help. B/S pre-purchase

Assets -
DLA 5,000

Share Cap 500
p/l reserves 5,500

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Replying to ENJAY:
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By ENJAY
28th Aug 2023 16:34

Sorry I realised doesn';t propertly show Dr & Cr

(cr) DLA -5,000

(cr) Share Cap -5,00
Dr P&L Reserves 5,500

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Replying to ENJAY:
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By Hugo Fair
28th Aug 2023 16:26

"The 7k cancelled the DLA owed to outgoing directors. so 5k to clear their balances"

... to make Ruddles' point in a different way - to whom did you pay the 'purchase' money (the company or the previous shareholders) ... and what entity gave you any form of 'receipt'?

BTW I take it that the transaction wasn't reviewed by an accountant or solicitor?

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Replying to Hugo Fair:
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By ENJAY
28th Aug 2023 17:02

Money was paid to the director of the business, same the 5k is owed to for the shares to be transferred and stamp duty paid on the transfer of shares.

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Replying to ENJAY:
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By Hugo Fair
28th Aug 2023 17:23

... but what did Director (a person) then do about the DLA:
- leave it as was (so it still owes him the £5k)?
- cancel it (by retaining £5k for himself, not for the company)?
- 'transform' it (so that it still owes £5k, but to you not to him)?

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Replying to Hugo Fair:
By Ruddles
28th Aug 2023 18:00

The whole thing sounds like a DIY job, without any real thought given to the various elements of the transaction. It would be interesting to know the sum on which SD was paid. Whether or not the whole thing was done in the most tax-efficient manner (I appreciate that was not the question) we will probably never know. Which is perhaps just as well for the client.

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Replying to ENJAY:
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By lionofludesch
29th Aug 2023 11:50

ENJAY wrote:

Money was paid to the director of the business, same the 5k is owed to for the shares to be transferred and stamp duty paid on the transfer of shares.

I wouldn't insist on this interpretation if I were you.

If it's true, the company still owes its former director £5000.

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By fawltybasil2575
28th Aug 2023 18:31

@ ENJAY (OP).

Since you have paid the £7,000 to the outgoing “director(s)”, the entries required in the Accounts are simply:-

Dr. Director’s Loan Account [outgoing director]
Cr. Director’s Loan Account [ENJAY].

(i) I assume ONE outgoing director (you have used the singular “director” in one place and the plural “directors” in all other places).
(ii) No Share Premium Account entries are required (as you have paid the outgoing director, not the company).
(iii) The Share Transfer figure should have been £7,000 (not £5,000).
(iv) I have difficulty in understanding your words - "same the 5k is owed to for the shares to be transferred and stamp duty paid on the transfer of shares" and have thus disregarded.

In view of the small amounts involved, I too surmise that no professional (especially lawyer) help was obtained in closing the deal: whether such be the case or not, my above comments assume that any share sale agreement and/or other documentation does not disprove any or all of (i) to (iv) above.

Again regardless of whether any professional help was obtained, I would recommend your requesting your accountant (or an accountant if you do not already have one) to confirm my above responses (frankly very probably not a difficult task and thus unlikely to be expensive - obtain a prior estimate if you have any concerns in that regard).

Basil.

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Replying to fawltybasil2575:
By Ruddles
28th Aug 2023 19:02

I don’t know what numbers you have in mind regarding your journal but I would suggest that that part of your response is inconsistent with (iii). Either he is paying for the shares or he is lending money to the company to allow the DLA to be repaid. Not both. (Except as I suggested earlier - £2k for the shares and £5k to swap the DLAs)

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Replying to Ruddles:
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By fawltybasil2575
28th Aug 2023 20:29

@ Ruddles.

I appreciate your views, as ever: my probable error (I apologise if such be the case) was the assumption that a valid DLA of £5,000 could be created for the OP (if such assumption is invalid, you are 100% right that my answers are inconsistent).

Please allow me to explain why I believe £7,000 is likely, albeit certainly not guaranteed, to be correct for the sale of the shares.

Prima facie, your closing reference to "£2k for the shares and £5k to swap the DLAs)" is of course correct.

However, given that the company has no net assets (disregarding the nebulous "licences" aspect) from which it can pay off those DLAs, then the true value of those DLA balances is probably nil, and hence in reality the OP (probably the OP's client per my later post below) is indeed in reality paying £7,000 for the shares. It appears unlikely than any other third party (we are not made aware of any such third party's existence) would pay £5,000 for the right to seek payment of that amount from a valueless dormant company.

[As I stated in my first post, all my figures were subject to their not being disproved by documentation. Such documentation could indicate frankly any figures for both the shares and the DLA "swaps"].

All this of course begs the question of whether it would be right, if and when the OP "gives life back" to the currently dormant company, by using licences which he considers valuable, to "reinstate" a DLA for £5,000 (or any other figure): frankly, if that were not possible (and very probably it would not be possible), it would open up the "can of worms" of the company's having £5,000 of taxable income (ie the write-off of the existing directors' DLA balances) although arguably this is "no big deal" as there are hopefully tax-allowable losses of around that same amount to be brought forward.

Forgive the "ramble"- as I said at the start, you are (most importantly) correct of the inconsistency of my first post (I apologise again).

Basil.

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Replying to fawltybasil2575:
By Ruddles
28th Aug 2023 20:39

Too many what ifs and maybes to support a proper discussion. But following your logic if no-one would pay £5k for the right to receive payment from a valueless dormant company why on earth would they pay £7k for the shares in that company?

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By fawltybasil2575
28th Aug 2023 18:44

@ ENJAY (OP).

After posting above, I have (out of interest) accessed your previous questions on AWEB. In reading them, and especially one of the two 16 December 2021 questions, which referred to your being "AAT" and an "ACCA affiliate", might I venture to suggest that your question today might possibly relate, not (as it states) to yourself personally, but to a client ?

Basil.

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Replying to fawltybasil2575:
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By ENJAY
29th Aug 2023 14:39

Thank you. I share this account with a few more people, but I purchased the dormant business, it would be easier to get a license with that business than starting one from scratch, hence the purchase.

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Replying to ENJAY:
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By lionofludesch
29th Aug 2023 14:42

ENJAY wrote:

Thank you. I share this account with a few more people, but I purchased the dormant business, it would be easier to get a license with that business than starting one from scratch, hence the purchase.

Share an account ?

Why?

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Replying to ENJAY:
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By Hugo Fair
29th Aug 2023 18:45

IF you really "share this account with a few more people", then you should read the site T&Cs - including:

"Your account and password:

If you choose, or you are provided with, a user identification code, password or any other piece of information as part of our security procedures, you must treat such information as confidential.
You must not disclose it to any third party.
If you use a social media login function, you must keep your social media account details confidential and must not allow any third party to access or use your social media account.

We have the right to disable any user identification code or password, whether chosen by you or allocated by us, at any time, if in our reasonable opinion you have failed to comply with any of the provisions of these terms of use."

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RLI
By lionofludesch
29th Aug 2023 07:26

Is he not paying the outgoing fella £5000 to repay the loan, which he is now owed by the company, and £2000 for the shares?

Neither of these need any entry in the company's books, apart from changing the name on the DLA.

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By taxdigital
29th Aug 2023 08:14

@OP
Sorry, is this so complicated?

You valued the company at £7k - consideration.

Paid £5k in to the company and paid off the vendor’s loan which is now replaced by a loan owed to yourself- £5k

£2k direct payment to the vendor.

I haven’t read other members’ comments though.

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Replying to taxdigital:
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By lionofludesch
29th Aug 2023 08:25

I thought that.

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Replying to taxdigital:
paddle steamer
By DJKL
29th Aug 2023 09:46

"Paid £5k in to the company and paid off the vendor’s loan which is now replaced by a loan owed to yourself- £5k"

How does that work?

Pay £5,000 into company

Dr Bank 5000
Cr Dir Loan Old £5,000

Surely there is no CR DLA in name of new owner created, if there is what is journal?

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Replying to DJKL:
ALISK
By atleastisoundknowledgable...
29th Aug 2023 10:50

The ‘Dir Loan Old’ is a credit balance.

CR new DLA
DR bank

CR bank
DR old DLA

But in reality DR old DLA, CR new DLA.

SPA probably should have said £2k for shares, buyer guarantees for co to repay £5k DLAs

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Replying to atleastisoundknowledgable...:
paddle steamer
By DJKL
29th Aug 2023 11:43

Apologies, had not appreciated the game had changed mid thread, appears all the early posts by the OP showing a £5,000 DR balance were incorrect.

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Replying to taxdigital:
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By Hugo Fair
29th Aug 2023 12:41

"You .. Paid £5k in to the company and .."

... except that OP said (at 17:02 on 28th Aug 2023):
"Money was paid to the director of the business".

So not into the company - hence my (unanswered) questions as to what Director then did.

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By fawltybasil2575
29th Aug 2023 09:06

@ Ruddles (your 20.39 post yesterday).

It is implicit, in your implied view, that (I) because one would not pay £5,000 to acquire ONLY a “PAPER debt” with a nominal value of £5,000 (but with a realistic value of nil, there being no rights to potentially large future income from the operation of the company) then (ii) it followed therefrom that one would not pay £7,000 for the SHARES in the company (with the attendant potential rights to substantial income).

I would respectfully suggest that such view is a non sequitur, since the two “animals” (i) and (ii) (I shall call them respectively a “cat” and a “hippo”) are entirely different. The fact that realistically there is an entirely worthless “paper debt” does not automatically mean that shares in that company cannot have a value of £7,000. Indeed, there can be circumstances where the “cat” can be worthless but the “hippo” has a value of millions (as evidenced by many public companies with seemingly mouth-watering share values based on future prospects). The OP has drawn our attention to one factor in this particular case, namely the licence factor, but there could be innumerable other scenarios which would illustrate the “different animals” concept.

Basil.

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Replying to fawltybasil2575:
paddle steamer
By DJKL
29th Aug 2023 09:47

We are told by OP why he/she wants company, it holds various licences he/she wants.

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Replying to fawltybasil2575:
By Ruddles
29th Aug 2023 09:51

Of course they are not immediately the same, but ultimately, in the context of the OP's situation, they are the same. If one were to invest in a seemingly valueless company in expectation/hope that its value would grow to enable a return of the investment, it follows that the same growth would instead allow the company to repay a debt of the same amount. Some might prefer the debt route as it would give them priority over equity holders. Others might prefer the equity route, hoping for a larger return on their investment. Horses for courses. There, that's another animal for you to consider.

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By Ruddles
29th Aug 2023 11:37

Still too many unknowns as to what was agreed, how much SD was paid etc. But taking a student approach to it:

Company has an invisible asset (licences) which is valued at £7k. But the company has a liability of £5k. So the company is worth £2k. End of.

In other words, if the company were to sell the licences for £7k cash and repay the DLA, what would be left in the company? That should be a useful pointer to the company's value.

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