Legal Definitions - bargain purchase

A bargain purchase occurs when an individual or entity acquires an asset, such as property, equipment, or even an entire business, for a price that is significantly below its fair market value. This situation often arises due to specific circumstances, such as a seller's urgent need to sell, financial distress, or unique market conditions that create an advantageous opportunity for the buyer. From an accounting perspective, a bargain purchase can sometimes result in "negative goodwill," indicating that the buyer acquired the net identifiable assets for less than their fair value.

• Example 1: Business Acquisition

  A struggling manufacturing company, facing severe liquidity issues, decides to sell one of its non-core divisions. A larger competitor, recognizing the division's underlying value despite the seller's distress, offers to buy it for 70% of its estimated fair market value. The competitor completes the acquisition, considering it a bargain purchase because they obtained a valuable business unit and its assets at a substantial discount due to the seller's urgent financial situation.

• Example 2: Real Estate

  A bank forecloses on a commercial property and, to clear its books quickly, lists it for sale at an auction with a reserve price well below its appraised value. An investor attends the auction and successfully bids on the property, acquiring it for 20% less than what comparable properties in the area are selling for. This transaction is a bargain purchase for the investor, as they secured a valuable real estate asset at a price significantly under its true market worth due to the distressed nature of the sale.

• Example 3: Personal Property/Collectibles

  During a local community auction to raise funds, a rare first-edition book is donated and inadvertently misidentified by the organizers, leading to a low starting bid. An avid book collector, recognizing the true rarity and value of the item, places a winning bid that is considerably less than what the book would fetch from a specialized dealer or at a major auction house. For the collector, this acquisition represents a bargain purchase because they obtained a highly valuable collectible for a fraction of its actual market price.