Purchase Consideration – Meaning & Methods

In case of amalgamation, purchase consideration is the agreed amount which transferee company (Purchasing company) pays to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash, shares or any other assets as agreed between both the companies.

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For example, XYZ Ltd is purchasing the business of ABC Ltd for an agreed amount of INR 5000K and 100K shares of INR 10 each. Here, purchase consideration is INR 6000K (5000000 + 1000000).

Purchase Consideration

Methods of Purchase Consideration:

There are four various methods which can be used in this calculation:

Net asset method –

Purchase consideration is equal to the total net assets of transferor company.

Total agreed amount of asset – Total agreed amount of liabilities

Net payment method –

Payment made to the shareholders of transferor company in form of cash, shares or debentures.

Lump sum method –

Fixed amount paid by the transferee company to the transferor company. This method does not require any calculation as the amount is decided by mutual consent of both the companies.

Intrinsic value/ Share exchange method –

It is calculated by dividing the net asset value of transferor company by price of one share of transferee company.

The result figure then divided by number of existing shares of transferor company to find out the ratio.

Intrinsic value – Net asset / Number of equity shares.

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22 thoughts on “Purchase Consideration – Meaning & Methods”

  1. Sir ! Suppose Goodwill is given in question then which method shall be used for calculating purchase consideration

    1. The value of Goodwill affects the total value of transferor company. Thus, it will increase the value of total amount payable by transferee company while using the Net asset method or Lump sum method.

      1. But sir! If in the balance sheet of the company, goodwill is there, it is understandable that’s the transferer would prefer net asset method but in either case why would promoter use lumpsum method if the co. Have a good reputation in market

        1. Here, I have 2 points:

          1) Value of goodwill – We are not sure about the value of Goodwill. Having goodwill on balance sheet does not mean that its value is high.
          2) Lump sum method – This method does not consider the value of individual assets. That’s does not diminish the worth of business. Sometimes, lump sum method pays off more than the net assets method.

          Let me know if you have any further question.

    1. Hi Sayali,

      In net asset method of amalgamation, purchasing company (transferee) and vendor company (transferor) decide the total value of assets and liabilities of vendor company. Let’s assume that the decided value of asset is 100,000 and total value of liabilities is 75,000 then the purchasing company will pay 25,000 (100,000 – 75,000) to vendor company.

  2. Tommorrow is my exam and i got to know about perfect short notes for purchase consideration.
    Thank you soo much.

  3. I was reading about this topic from one hour from my class notes but I dint get it. Then, I read it from here and I totally got the point. Thank you!

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