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If you run a company, you may come across the term ‘going concern’. Going concern describes a business likely to avoid liquidation for the foreseeable future as it can meet its financial obligations. This article will describe some key features of going concern, alongside some instances when it may be relevant to your business.
What is a Going Concern?
As mentioned, ‘going concern’ reflects that your company’s financial statements show that it is likely to continue operating for the foreseeable future (usually around 12 months). Operating on a going concern basis shows that your business intends to keep its operations and activities going for at least the next year without liquidation concerns. Liquidation is where you sell the assets of a business to pay back its debts.
How Do I Assess Going Concern?
Company directors will assess going concern when reviewing whether a business can operate as part of its financial statement. Financial statements are usually made on an annual or bi-annual basis. If a director is planning to proceed to liquidation or stop trading, the company will not be able to continue on a going concern basis.
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Audit Report
If your company is big, an auditor may assess your financial situation.
Small and Medium Sized Businesses
If your company is a small or medium-sized business, you may not need an audit report from an auditor. Instead, the company directors will complete the going concern assessment.
The directors can complete this process using accountants familiar with the going concern assessment process. So long as your company is likely to be able to continue operating for the next year, you are likely to pass the going concern assessment.
What is a Sale of a Business as a Going Concern?
You may come across a sale of a business as a ‘going concern’. This means that when the business is sold, the buyer of the business takes all of the things that are necessary for the business to continue operating. This will include:
- equipment;
- supply accounts; and
- rights in land, such as a lease.
Although the term can be uncommon in the UK in the context of a sale, it is worth keeping this in mind if you come across a sale agreement that uses the words ‘going concern’. The best practice, in this case, is to ensure you have good legal advice.
What if I Have to Liquidate?
If your business is going to proceed with liquidation, you must sell your assets to pay off your liabilities. For example, you must repay outstanding mortgages, loans and unpaid wages. If you are liquidating your business, you should seek professional legal advice to ensure you carry out the procedure correctly.
You can also seek financial support through further loans or investments to avoid liquidating. Additionally, you are more likely to receive loan approval if you are willing to offer a personal guarantee. This is a promise to the loan provider you are personally liable if your business cannot repay its debts. This can be dangerous as it puts your personal assets at risk. Therefore, you should only do this in specific situations where you are certain you are not jeopardising your personal assets.
Key Takeaways
The term ‘going concern’ indicates that your business is likely to be able to carry on operating for the foreseeable future. This usually depends on the business having good cash flow and sound financial statements. If there is significant doubt that your business will be able to keep operating for the near future, for example, if it cannot pay its debts, you may have to proceed on a liquidation basis. If your business is a large company, you may have to use the service of an auditor to get a going concern assessment. However, if you run a small business, the company directors will be in charge of making the going concern assessment, and this will usually involve hiring an accountant.
If you need legal advice for your business, LegalVision’s experienced commercial 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
Going concern refers to the ability of a business to continue its operations for the foreseeable future.
Liquidation is where your business sells its assets to pay off its liabilities.
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