Selling a business as a going concern can provide prospective buyers with the chance to invest in an established and affordable enterprise, saving valuable time, resources and start-up capital as the business can continue trading from day one of the transfer, without any interim transition period.
However, it may not always be possible to sell a business as a going concern. Identifying when these circumstances apply is critical to ensuring you make an informed decision about the future of your business.
In this guide, we look at what a ‘going concern’ means and how to check if your business qualifies. We also look at the steps to be taken when selling a business as a going concern, as well as alternative options.
What is meant by a ‘going concern’?
In accountancy terms, a ‘going concern’ is commonly used to describe a business that is financially stable, one which can fulfil its liabilities as and when they fall due, with no threat of impending liquidation, even though the business may have previously struggled financially.
Similarly, a ‘going concern’ in the context of selling a business is one that has regained stability following a period of financial uncertainty, such that it can now trade confidently without the threat of closure for the foreseeable future, usually for the next 12 months. The business may have undergone formal restructuring to streamline the way in which it operates, eliminating unnecessary expenditure and maximising efficiency, where it will now be well placed to continue trading without disruption from legal action or deterioration of financial health.
In short, if you are selling a business as a going concern, you are effectively offering a complete package. This means that the new owner will be able to pick up where you have left off, with everything they need to maintain daily operations, where the business and all its assets will be transferred to the buyer on completion of a successful sale. The intention when selling a business as a going concern is that the new owner will keep the business up and running in its current financial state, using existing available resources, such as equipment and premises.
How do I check if my business qualifies as a going concern?
Deciding whether or not a business qualifies as a going concern can be somewhat subjective. In broad terms, to be sold as a going concern, your business must be predicted to be able to operate over the course of the next 12 months without the threat of liquidation, even if it has previously been struggling financially. A going concern therefore means that the business:
- is currently financially stable, with a reasonable outlook for at least the next trading year
- does not have any decisions to make about significantly cutting back operations
- is not exposed to liquidation or other insolvency proceedings, or is not imminently intending to undergo an insolvency process.
To assess the financial stability of your business, and its overall outlook for the next trading year, you will need to undertake a financial health check, ideally with the help of a qualified accountant or licensed insolvency practitioner. This will mean carefully assessing all of the available financial facts and figures, and by asking yourself the following three key questions:
- Does your business have adequate cash flow to pay its bills when they fall due, and to repay creditors and cover unexpected costs?
- Do your business assets outweigh its liabilities on your balance sheet? This is also commonly known as ‘debt to asset ratio’.
- Is the business making a loss after deducting expenses and costs? By calculating gross profit, before tax, this will allow you to assess whether or not the business is financially viable.
After carrying out a business health check, you will be able to determine if your business is a going concern, and can be sold as such. Even if the business has been seriously struggling over the last few months, making it difficult to create accurate forward predictions, it may still be considered a going concern. However, if it is clear that the business cannot continue trading as it is, with no positive indicators that things may change — known as a negative going concern — it may require urgent insolvency support to avoid company closure.
Conditions that can lead to substantial doubt about a going concern business include continuous losses from one period to the next, loan defaults and denial of credit by suppliers.
What process should be followed when selling a business as a going concern?
Even though your business may have recently experienced a period of deterioration in its financial health, when advertising a business as a going concern, this will inform prospective buyers that the business has regained financial stability. As a ‘going concern’, it now represents a valuable commercial acquisition opportunity, backed by due diligence checks.
However, by selling a business as a going concern, there are various factors specific to this type of sale that must be considered — provided an acceptable offer is received — including:
- Obtaining legal advice: the contract for sale will need to explicitly state that the business is being sold as a going concern and must be drafted accordingly
- Obtaining tax advice: there can be all kinds of tax implications when selling a business as a going concern, including satisfying the requirements to claim VAT exemption (see below)
- Maintaining business continuity: you will need to be in a position to keep up trading until the business has sold, where any failure to do so might be classed as a breach of contract.
The basic premise of selling a business as a going concern is that it will remain active for the foreseeable future. This means that if you have ceased trading, you cannot sell a business that is not operational as a going concern. Having accepted an offer, you must therefore keep the business running until the date of the transfer. This is crucial because the new owner will need access to all assets and accounts associated with running the business, enabling them to pick up where you left off. They will also need transfer of equipment, leases and contracts.
It is open to the new owner to decide at a later date if they want to change the way in which the business is run but, until handover, you will be responsible for running the business as normal. This condition will typically be included as a clause in the pre-completion obligations set out in your Transfer of a Business as a Going Concern (TOGC) sales contract.
How do I claim VAT exemption when selling a business as a going concern?
If you meet the relevant requirements criteria, your business sale may be exempted from Value Added Tax (VAT). Normally, when selling the assets of a VAT-registered business, you would need to account for and pay for VAT at the applicable rate. However, a transfer of a business as a going concern (TOGC) will not be treated by HMRC as a supply for VAT purposes. This means that, where the TOGC conditions are met, the sale will fall outside the scope of VAT.
To qualify as a TOGC, for which VAT is not chargeable, the assets sold must be capable of forming a separate business in their own right and used by the buyer to carry on the same kind of business as that operated by the seller. To be exempt, all of the following must apply:
- all the assets belonging to the business, such as stock, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the transfer
- the buyer must intend to use these assets in carrying on the same kind of business as
- the seller, where operations do not need to be identical must be in the same sector
- the buyer must be a taxable person or become one as the result of the transfer
- the buyer must notify HMRC of any buildings and/or land included that would have usually been standard-rated for VAT purposes
- where only part of the business is sold, it must be capable of operating separately
there must not be a series of immediately consecutive transfers of the business.
Application of the TOGC rules is not always clear cut. In these circumstances, seeking expert advice is always recommended to help establish whether the VAT exemption applies. This is because you need to work out whether or not the transfer of a business should be treated as a TOGC to ensure that the correct amount of VAT, when chargeable, is accounted for and paid.
What other options are available to selling a business as a going concern?
If your business is nearing insolvency, you may still be able to sell on the open market, although this route may prove to be challenging due to the failing health of your business. However, there is an entire marketplace dedicated to the sale of financially distressed businesses where, with expert help and guidance, there are a number of ways in which you may be able to increase the attraction of your business and to maximise its value.
In cases where your business has already become insolvent, you are highly unlikely to be able to sell your business as a going concern, at least for the time being. Instead, you may need to consider what measures can be taken to get the business out of financial trouble, such as support in the form of commercial finance, although being in the red can often result in declined finance applications. Other ways to get your business back to being profitable, and in the black, could include selling assets, cutting expenses, receiving additional equity contributions from shareholders, and restructuring debt to avoid liquidating the company.
However, you may need to consider formal insolvency measures to protect the business from legal action by creditors. By putting a company into administration, this can provide the business with much-needed breathing space, protecting it from being wound up for a defined period of time. A licensed insolvency practitioner (IP) will be appointed to assess the company’s viability and prepare a plan to exit the administration procedure.
In addition to all the matters set out above — including selling off assets, reducing expenses and restructuring debt — one of the options available to the IP is to sell the business as a going concern. If this proves to be a viable exit route, the IP may either sell the business on the open market or via what is known as a ‘pre pack’ sale. A pre-pack sale is a planned insolvency procedure in which a company and its assets are sold by the administrator to a pre-designated purchaser on or soon after their appointment. Still, if your business currently has operating liquidity, you may be better placed to sell your business to the highest bidder and achieve a greater return in comparison to a pre-pack sale.
In all cases, seeking expert advice before deciding on a course of action will often prove to be invaluable, where selling a business as a going concern can be a legal minefield, involving as it does so many aspects of property law, employment law, tax and VAT.
Selling a business as a going concern FAQs
What makes a business a going concern?
A business can be classed as a going concern if it can confidently trade without the threat of liquidation or closure for the foreseeable future, typically for at least 12 months, even following a period of financial uncertainty and instability.
What is a transfer of a business as a going concern?
A transfer of a business as a going concern (TOGC) is where the business and assets required to maintain daily operations, such as equipment and premises, will be transferred to the buyer to enable trading to continue without disruption.
Is VAT payable on a transfer of a going concern?
Provided the transfer of a business as a going concern (TOGC) falls within the relevant rules, it will be treated by HMRC as ‘neither a supply of goods nor a supply of services’, and therefore outside the scope of VAT.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.