What does it mean to sell a business as a going concern?
Posted on 20 Sep 2023, by admin
Selling a business as a “going concern” means that the business is being sold in a state where it is expected to continue its operations in the foreseeable future without any intention or necessity to liquidate or wind up its operations. The business, when sold as a going concern, typically includes all assets, liabilities, and everything necessary for the buyer to continue the operations seamlessly.
Is it good if a company is a going concern?
Yes, if a company is a going concern, it indicates financial stability and a positive outlook on the company’s ability to continue its operations without any imminent threat of cessation or liquidation. This implies that the company is not only surviving but has the potential for future profitability. For stakeholders, employees, creditors, and investors, this is a positive sign as it means the business is sustainable.
What is an example of a going concern?
Suppose there’s a popular restaurant that has been running successfully for a decade. The owner decides to retire and sell the restaurant. If this restaurant is sold with all its equipment, staff contracts, and even its reservation book, with the expectation that the buyer will continue running it as a restaurant, it is sold as a ‘going concern’.
What are the benefits of going concern?
- Continuity: It ensures a seamless transition of business operations from one owner to another.
- Employee security: Jobs are more secure as the business isn’t winding up.
- Stakeholder trust: Creditors, suppliers, and customers maintain their trust in the business as they expect it to continue operating.
- Valuation: A business operating as a going concern usually has a higher valuation compared to one that’s liquidating.
Can you sell a business as a going concern?
Yes, a business can be sold as a going concern. It means the business is sold with the expectation that its operations will continue under new ownership, including all its assets, liabilities, operational structures, and even its brand name in some cases.
How to calculate a business as a going concern?
Calculating the value of a business as a going concern typically involves several methodologies:
- Earnings-based approach: Projecting future earnings and discounting them to present value.
- Asset-based approach: Evaluating the current value of all business assets.
- Market-based approach: Comparing with similar businesses in the market.
A combination of these approaches, along with an analysis of liabilities, contracts, and potential future risks, will give an accurate business valuation.
What does going concern mean in valuation?
In valuation, the going concern principle assumes that a business will continue its operations indefinitely and will not liquidate in the near foreseeable future. This concept affects the valuation because businesses that are expected to continue operations typically have a higher value than those that are expected to cease operations or liquidate.
Who is responsible for stating that a company is a going concern?
The responsibility primarily lies with the company’s management. They need to assess whether the company can continue its operations for the foreseeable future. Additionally, auditors play a crucial role by reviewing the company’s financials and making an independent assessment of its going concern status in their audit report.
Why is going concern important in business?
The going concern principle is foundational in financial accounting. It assures stakeholders that the company plans to continue its operations and meet its financial obligations. This underpins many accounting principles and affects how assets and liabilities are recorded.
Is going concern a financial risk?
Not in itself. However, if there are doubts about a business’s ability to continue as a going concern, it can signify financial risk. Creditors or investors might be wary of a business that isn’t expected to continue its operations in the long term.
What are the key indicators of going concern?
Key indicators include:
- Profitability trends: Consistent profits suggest a healthy going concern.
- Liquidity ratios: Can the company meet its short-term obligations?
- Debt levels: High levels of debt can threaten the going concern status.
- Economic factors: External factors like economic downturns can influence going concern status.
What does it mean to buy a business as a going concern?
Buying a business as a going concern means acquiring a business that’s expected to continue its operations without any significant changes or interruptions. It ensures the new owner is getting a fully operational business, complete with assets, liabilities, and existing operational structures, that can generate revenue immediately upon purchase.
In the vast majority of cases, businesses are bought and sold on the basis of being a going concern. The buyer expects to buy the business and then proceed to carry on running it as it has been prior to the sale and the seller is selling the business under a similar assumption.
The simple reason for this is that if it is not a going concern then the business is most likely not attractive for someone, or another business to buy except for in certain circumstances. This means that selling as a going concern is how the seller gets the most value for their business and the buyer has the greatest chance of generating a return on their investment.
For further information and impartial advice, feel free to contact our founders at Dexterity Partners.
