Bargain PurchaseExplained & Defined

Written By:
Adiste Mae

What is a Bargain Purchase?

A Bargain Purchase happens when assets are sold at less than their Fair Market Value.

This usually occurs in business acquisitions where one company purchases another for less than the fair market value of its net assets.

It rarely happens but is caused by a combination of businesses when faced with a liquidity crunch. 

When accounting for a Bargain Purchase, the acquirer must record the difference between the Fair Market Value of the net assets acquired less its purchase price and record the gain due to negative goodwill on the Income Statement. 

How a Bargain Purchase Works

When there is a liquidity crisis or liquidity crunch, Bargain Purchases happen often.

This forces businesses and assets to be acquired for less than their Fair Market Value to quickly come up with cash. 

A Bargain Purchase happened during the 2008 Market Crash when many companies were forced to sell below the fair market value and traded with huge discounts.

This presented firms the opportunity to make bargain purchases and an addition to their asset bases at a low cost. 

Special Considerations

Even when bargain purchases are acquired below the fair market value, the assets and liabilities are to be recorded at their fair market value.

They must also be properly analyzed to ensure that all the assets and liabilities are accounted for.

The acquirer will then record the difference between the fair market value and the purchase price as a gain from negative goodwill. 

An example is when Company A offered to sell half of its business with total assets of $600,000 and total liabilities of $200,000 or a Net Asset of $400,000 half of which is $200,000 (($600,000 – $200,000) / 2) for a total consideration of $100,000.

Company X decided to buy half of Company A for $100,000. 

To record this bargain purchase in their books, Company X will record a gain of $100,000 which is the fair market value of half of the net assets less the purchase price ($200,000 – $100,000). 

Examples of a Bargain Purchase

The most notable bargain purchase in history was when the North American investment banking operations of the Lehman Brothers were acquired by Barclays in September of 2008.

This acquisition through bargain purchase has resulted in the addition of approximately GBP 2.26 billion in the books of Barclay’s due to negative goodwill. 

Another famous bargain purchase happened in 2009 during the takeover by LloydsTSB of HBOS plc, the holding company of the Bank of Scotland plc.

The takeover has resulted in negative goodwill of approximately GBP 11 billion – the same amount that was added to their net income and their asset base.