Selling Your Business As A Going Concern: What Does It Mean?July 6, 2021
There are all sorts of ways to sell a business. One option is to sell it as a going concern - but what exactly does 'going concern' mean?
In short, if you're selling a business as a going concern, you're offering a complete package.
The buyer can pick up where you've left off, with everything they need to keep operations running smoothly.
In contrast, if the business sale is not a going concern, it's likely a fragment of a company - such as the equipment and client database.
We appreciate that deciding whether a business is a going concern can be somewhat subjective. We’ve created this guide to clear up any confusion you might have.
How to determine whether a business is a going concern
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.
Can I sell my business this way?
Even if you haven't been able to trade for several months and therefore find it tough to create accurate forward predictions, it may well still be considered a going concern.
You'll need to look at financial statements, cash flow, trading figures and reports. These can conclude if the business can continue trading as-is and whether there are any indicators that things may change.
If you're thinking of selling a business as a going concern and want clarification about this status, get in touch with Hudson Weir. We can guide you through the facts.
What is the process of selling a business as a going concern?
Firstly, you'll need to keep the business running fully until the date of the transfer. This is usually the settlement date when the buyer pays the agreed balance.
That's crucial because to be sold as a going concern the buyer will need:
- Access to all assets associated with running the business
- Transfer of equipment, leases and contracts
- The accounts for all materials, goods and other supply chains
If you've ceased trading, you can't sell a business that isn't operational as a going concern.
After the buyer moves in, they will continue operations, and can later decide if they want to change anything.
As a vendor of a going concern, you're responsible for maintaining possession of the premises and assets until that handover.
This condition is usually a clause in the pre-completion obligations in your Transfer of a Business as a Going Concern (TOGC) sales contract.
Three key factors to selling a going concern company
Before you list a company for sale on the open market or contact 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
We've mentioned taxes here, and that's because if you meet the proper criteria, your business sale can be exempted from VAT.
How to claim VAT exemption on your business sale
Ordinarily, if you were selling assets of a VAT-registered company, you'd need to account for VAT at the applicable rate.
However, you can claim exemption on a going concern sale provided you follow the HMRC TOGC rules.
Eligible sales must:
- Include all assets belonging to the business, including premises, goodwill, machinery and fixtures
- Be bought by a buyer who expects to continue the same business. Operations don't have to be identical but need to be in the same sector
- Be made to a buyer who is a taxable person
- Notify HMRC of any buildings or land included that would have usually been standard-rated for VAT
Note that TOGC rules can become somewhat ambiguous.
Often, scenarios aren't cut and dried. You could require a business expert to identify whether the sale constitutes a going concern business or just some of the assets.
If you would like more information about selling a business as a going concern or establishing whether ‘going concern’ applies to your circumstances, get in touch with Hudson Weir at your convenience.