online Business asset purchase initial accounting

by Tom
(Chicago, Illinois, USA)

I am going to purchase an online business. Seller is the only employee running the business with one computer. This is an ASSET purchase. I get the website name, non-compete for 5 years. I will buy a new computer to run the business. So looks like all purchase price is for goodwill, supplier transfer and website and non-compete.


Total price is 265k. Down payment is 150K. Remaining 115k is seller financed loan for 3 years at 5%.

Of the down payment 125k is my savings and 25k is loan from my dad. So I will transfer 125K to the S-corp to be formed and dad will loan to that s-corp. Dad's is non-interest bearing loan payable when I have money.

Note: my 125k + dad's 25k will be paid to seller at closing as down payment. My 125k is investment and dad's is a loan.

Should I treat my investment as a loan too?

So how to do the initial accounting for cash, loan, goodwill etc.

(I plan to draw salary for s-corp. So 50K is reasonable for 175K profit before loan payment and about 125K profit after loan payment?)

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Hi Tom!

Sorry it took me a couple days to respond to your question - I took a couple days off for Christmas.

When you purchase a business, any business, you need to come to an agreement with the seller of what you're buying - usually equipment, fixtures, inventory, the name, the phone number, etc., but with an online business, you're purchasing a web address, supplier relationships, customers, etc.

How to treat that on a Balance Sheet is something unique.

Normally, after a business purchase, you may post an entry to book "Investment in ABC Company" or you may just purchase certain assets, not the entire business - and book Equipment, Fixtures, Customer List, and even Goodwill.

To me, it looks like your initial entry will be to book the Non-Compete, which is amortizable, the website value, which would be to an asset account like "Investment in ABC.com", and then Goodwill. Goodwill is NOT amortizable, therefore try to put your purchase price to something more tangible if at all possible.

Your investment will be a debit to Cash and a credit to Owners Equity-Contributions. Your Dad's money will be a debit to Cash and a credit to "Note Payable - Dad", a long-term liability account.

When you hand over the down payment you'll post an entry with a debit to your asset accounts, maybe Supplier List, Investment in Whatever.com, Covenant to Non-Compete, and Goodwill, and your credit will be to Cash.

Your salary should be similar to what you'd be earning if you worked for another company doing a similar job. It sounds reasonable to me.

If you need further assistance, Tom, or have other questions, feel free to email me again.

Hope I've helped!
Kathy

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