A going concern is a business that is expected to operate for the foreseeable future. The term is often used in the context of financial reporting, where businesses must disclose whether they are a going concern or not. In order for a business to be considered a going concern, it must have enough cash on hand to meet its financial obligations for the next 12 months.
If there is doubt that a business can meet its financial obligations, then it is said to be “not a going concern.” Businesses that are not going concerns may be sold as “assets only” or may be liquidated. When a business is sold as a going concern, the new owner typically assumes all of the business’s liabilities and continues to operate the business in its current state.
This type of sale can often be advantageous for both the buyer and the seller, as it allows the buyer to avoid the hassle and expense of starting a new business from scratch, while also providing the seller with a more certain return on their investment.
- 1 What does it mean to sell a business as a going concern?
- 2 Transferring a business as a going concern
- 3 How to calculate a business as a going concern
- 4 Advantages of buying a business as a going concern
- 5 Disadvantages of selling a business as a going concern
- 6 Three key factors to selling a going concern company
- 7 Sale as a going concern out of administration
What does it mean to sell a business as a going concern?
When a business is sold as a going concern, it means that the buyer is assumed to continue operating the business in its current state. This includes taking on the same employees, suppliers, and customers. The advantage of selling a business as a going concern is that it often results in a higher sale price.
This is because the buyer is effectively buying an existing customer base and an ongoing revenue stream. In addition, selling a business as a going concern can help to minimize disruptions and ensure a smooth transition for all parties involved. However, it is important to note that not all businesses are suitable for this type of sale.
For example, businesses with significant levels of debt or those that are highly dependent on the owner’s personal relationships may not be good candidates for a going concern sale. Ultimately, whether or not to sell a business as a going concern is a decision that should be made on a case-by-case basis.
Transferring a business as a going concern
For businesses, change is a constant. Whether it’s adapting to new technologies or evolving to meet the needs of customers, businesses must be able to adapt or risk becoming obsolete. However, sometimes change can be much more radical, such as when a business is sold or transferred to new ownership.
In these cases, it’s important to ensure that the business is transferred as a going concern. This means that the business should continue to operate without interruption and that all of its assets and liabilities are transferred to the new owner. While this may seem like a daunting task, there are a few steps that can be taken to make the process smoother.
- First, all employees should be informed of the change in ownership and given ample time to adjust.
- Second, a thorough inventory of all assets and liabilities should be conducted.
- Finally, all contracts and licenses should be reviewed to ensure that they will remain valid under the new ownership.
By taking these steps, businesses can help to ensure a seamless transition and minimize the disruption to their operations.
How to calculate a business as a going concern
A going concern is a business that is assumed to continue operating for the foreseeable future. The term is typically used in reference to financial statements, such as the balance sheet. When calculating a business as a going concern, the assumption is made that the company will be able to meet its financial obligations and continue operating without interruption. This can be a difficult assumption to make, particularly for small businesses.
However, there are some key indicators that can be used to evaluate whether a business is likely to remain a going concern. These include the company’s profitability, cash flow, and level of debt. If a business is consistently profitable and has positive cash flow, it is more likely to be considered a going concern than one that is struggling to meet its financial obligations. The level of debt is also important, as companies with high levels of debt are more likely to default on their payments.
Ultimately, the decision of whether to classify a business as a going concern is one that requires careful consideration and analysis. However, by evaluating all of the available information, it is possible to make an informed decision about the future prospects of the company.
A going concern means that the business:
- Is financially stable, with a reasonable outlook for at least the next trading year
- Doesn’t have any decisions to make about materially cutting back operations
- Isn’t exposed to liquidation or any other kind of insolvency proceedings or imminently intending to undergo an insolvency process
It’s a vital point because following a year of substantial economic difficulties, it might feel like almost any business in your sector could be excluded from this definition.
Advantages of buying a business as a going concern
When it comes time to sell your business, there are a few different options available. One option is to sell the business as a going concern. This means that the buyer will take over the business and continue to operate it in its current state. There are a few advantages to selling your business as a going concern.
- First, it can be easier to find a buyer because they don’t have to worry about starting from scratch.
- Second, they will likely be able to get financing more easily since the business already has established revenue streams.
- Finally, you may be able to negotiate a higher price since the buyer is getting an operational business.
Disadvantages of selling a business as a going concern
However, there are also some disadvantages to selling your business as a going concern.
- First, you will have to provide training and support to the new owner in order to ensure a smooth transition.
- Second, the new owner may want to make changes that you are not comfortable with.
- Finally, there is always the risk that the new owner will not be successful and the business will fail.
You will need to weigh all of these factors carefully before deciding whether or not selling your business as a going concern is right for you
Three key factors to selling a going concern company
Before you offer your business for sale on the open market or make contact with a broker to facilitate a deal with interested buyers, you’ll need to think about a few elements.
- Legal advice – your contract of sale must be watertight and state explicitly that the business sale is a going concern (that’s essential for taxes, more on that shortly)
- Tax advice – it’s well worth seeking guidance from an established tax expert to ensure you’ve satisfied requirements to claim VAT exemption
- Business continuity – you need to be in a position to keep up trading for as long as it takes until the transfer date, and any failure to do so might be considered a breach of contract.
Sale as a going concern out of administration
Administration of a company provides a breathing space for firms that are in a financial crisis, this solutions offers protection from legal action by creditors for a defined period of time. Licensed insolvency practitioners are appointed in order to make an assessment of the company’s viability, then offer and prepare a plan to exit the procedure.
The sale of the business in administration as a going concern is one route to exit an administration. If there is a viable option for the insolvency practitioner to either sell the business on the open market, or via a ‘pre pack’ sale then this solution is offered.