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There are various types of business sale in the UK. A sale of a business as a ‘going concern’ describes a business whose management is confident that it can continue running for at least 12 months. As such, the going concern test is an essential one that all businesses looking for a buyer need to pass. This article will unpack what going concern means in practice.
Overview
Most buyers expect to purchase a target business as a going concern. The exception is for distressed businesses that are bought with the intention of dividing up their assets and selling them off. Otherwise, a target business needs to demonstrate it can operate for the next 12 months (and more).
From the buyer’s perspective, a going concern business indicates that it:
- has the finances to continue trading for at least 12 months;
- is unlikely to face any insolvency proceedings in the near future; and
- has the financial records demonstrating its solvency over the next year.
Obtaining ‘Going Concern’ Certification
As you may expect, a business’s seller cannot just label its business as a going concern when it is, in fact, not.
Instead, the business owner should carry out a going concern assessment. Going concern assessments explore all aspects of a company’s finances but tend to focus on the following points in particular:
- the figures within the company’s balance sheet and financial statements;
- continuous cash flow figures;
- any profitable and ongoing contracts with clients or consumers;
- the value of any business assets;
- any long-term instalment plans with third parties (for example, business rent or bills); and
- whether the company is facing or is likely to be involved in any expensive legal action.
Small to medium-sized enterprises (SMEs) usually conduct their own going concern assessments, usually with the help of an accountant. Larger businesses are more likely to use auditors. This is due to both regulatory obligations as well as the complexity involved in certifying the accounts of large businesses.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
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Effect of a Sale as a Going Concern
Usually, a sale as a ‘going concern’ is one in which the new owner intends to acquire the company and keep it trading similarly. Because of this, nearly every going concern business sale includes substantially all of the business:
- equipment, property and machinery;
- trade secrets, branding, trademarks and Intellectual Property (IP);
- rights to land (including commercial leases and rental periods);
- details of every client, contact and supplier; and
- the continuous employment of every staff member as of the point of business transfer.
In any event, the buyer should instruct a team of legal and financial advisers to review the sale documentation.
How Much of a Guarantee Does a ‘Going Concern’ Moniker Offer?
Because prospective purchasers are unlikely to consider a target business without a going concern certification, it is more of a formality than anything else. For context, most companies must certify their annual accounts on a going concern basis. Despite this, most companies that end up in insolvency proceedings reported themselves as going concerns in the 12 months before.
Therefore, the buyer should carry out due diligence to determine for itself the financial state of the business. This involves reviewing and considering the documents mentioned within the going concern assessment. Naturally, many prospective purchasers will ask an account or financial expert to evaluate the accuracy of a going concern assessment.
Another relevant consideration is when they carried out the going concern assessment. It would not be of little value to potential buyers if performed a year (or more) earlier.
Key Takeaways
Most prospective business purchasers will treat a ‘going concern’ label as a necessary formality. This moniker usually indicates that the company is in good financial health and will continue to trade for the next year. That said, sellers may not have employed the best accounting methodology when forecasting their business’s performance. Accordingly, most potential purchasers will instruct expert lawyers and financial advisors to review the company’s finances before the purchase.
If you need assistance with a company sale or purchase as a ‘going concern’, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Not usually, no. The only usual way a purchaser can claim monies for loss caused through a sale is when the documentation provided for due diligence is false or misleading.
No, any individual wishing to purchase a UK company should carry out the same level of due diligence regardless of its description. After all, any seller can use persuasive words, but the actual proof of financial health lies within the company’s financial reporting documents.
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