Selling a Business as a Going Concern

Selling a business as a going concern requires a few extra considerations compared to a straight sale of goods and assets.

This is especially true of companies that employ a significant amount of staff, as employment law and other factors will have to be adhered to.

It’s strongly recommended to use a specialist business sales team to guide you along the process, but if you’re just starting to look into the possibility of selling a business as a going concern, there’s a handful of things you should be aware of.

 

What does ‘going concern’ mean?

In its simplest definition, selling a business as a going concern means that it’s operating normally and appears to be a sustainable and healthy company.

There are stricter financial terms that determine whether or not a business can be classed as a going concern, however. Accountants, for example, may deem a business as a going concern if they feel its unlikely to encounter insolvency or closure in the following 12 months.

A company trading as a going concern should also be able to fulfil all of its financial obligations without having to sell off its assets or restructure its debts to do so. All in all, from a buyer’s perspective, the purchase of a business as a going concern should allow them to pick up exactly where the seller left off, with minimum disruption to day-to-day operations.

 

Is a going concern good or bad?

Having the business you’re selling classed as a going concern is good. This means that not only is it financially healthy at the moment, but it should also be profitable for at least the next 12 months.

As a seller, this allows you to negotiate a strong price for your business, as a buyer can step straight in and start making a profit.

 

 

What is an example of a going concern?

If a businessman purchased a successful greengrocers from its retiring owner, and carried on trading with the same staff to the point that a customer would barely notice any difference, he would have bought the business as a going concern.

If, however, the businessman bought the same greengrocers and turned it into a toy shop, this would not be a going concern.

Similarly, if the greengrocers was struggling with mounting debts and an uncertain future, this wouldn’t be classed as a going concern either.

 

 

What are the benefits of selling a business as a going concern?

Better prices

As you might expect, a ready-built profitable company that allows new owners to hit the ground running will attract a better price than one that needs working on in the hope that it turns around.

 

Staff job security

Your staff actually make up part of the transaction when selling a business as a going concern. They should be able to keep the same jobs with little or no changes.

 

Reputation upheld

If a business has to be rebuilt from the ground up under its new owners, it can lead outsiders to question your previous stewardship. By carrying on in its day-to-day operations as before, most won’t even realise the business is in new hands.

 

 

What is classed as a going concern?

A good sales advisory team will be able to advise if your business can be sold as a going concern. This will usually entail the studying of financial records to calculate the ratios that show a business is healthy. This can involve several different financial ratios, but the most common are debt ratios, net profitability ratios, and current ratios.

 

Debt ratio

This is determined by dividing your company’s total liabilities by its total assets. If its liabilities are greater than the total value of its assets, then the business is actually insolvent. Insolvent businesses can not be classified as a going concern in the vast majority of cases.

 

Net profitability ratio

This is determined by dividing your net profit by net sales. This provides a figure that shows at a glance whether profits are substantial enough to be sustainable. If production or distribution costs are too high, it could be that profits are small enough to be at risk of any rises in production costs.

 

Current ratio

This ratio is determined by dividing a company’s current assets by its current liabilities. This shows how easily your business can pay its short-term debt obligations with cash derived from assets within the next 12 months.

 

To be able to class a business as a going concern as it’s sold, the buyer will need to have access to:

• All assets needed in the day-to-day running of the business
• All supplier accounts
• All contracts and leases

Despite all of these stipulations, classifying a business as a going concern is rarely a black and white process. Businesses that don’t meet this criteria may still be able to qualify as a going concern, and vice versa. As such, it’s highly recommended to enlist the help of a specialist business sales team.

 

 

 

Transfer of a going concern VAT considerations

The sale of a company involves the transfer of several individual assets in one transaction. While VAT would usually be applied to individual assets, selling them all as part of an ongoing concern can sometimes see the seller avoid having to pay VAT. To qualify for VAT exemption, your transaction will have to meet a number of conditions. The criteria for the transaction are as below:

• The buyer must not intend to change the type of business the company is. Shuffling things around to suit a new style of working is fine, for example, but converting a fishmongers to a barbershop is not.
• If the seller is a taxable person, the purchaser must be too (or become one once the transaction has been completed.
• In instances where only part of the business is sold, it must be a part that’s capable of operating independently.
• There cannot be a series of immediately consecutive transfers.
• There cannot be a large break in trading. HMRC expects that everything should carry on running as normal, with no significant gap between closing and reopening (if there has to be any at all). They will allow for a short break for things like redecorating however.

 

A company’s assets are considered part of a TOGC (TOGC meaning Transfer Of a Going Concern), when they meet the following conditions:

• The assets are able to be bought by another person, and their seller may stop trading.
• If the current owner were to die or retire, the business assets could be taken on by somebody else.
• Part of the existing business may be sold to somebody else.
• The assets are able to be transferred to a new legal entity.

If all of these conditions are met by the transaction, any sale of buildings or land can be said to be part of a transfer of a going concern, and thus exempt from VAT.

 

Can my business sale still qualify as a TOGC if the buyer is not registered in the UK?

Government guidance on such situations is that “a TOGC can still occur if the buyer is a non-established taxable person”. These are buyers that are not permanent residents in the UK, don’t have any base of operations in the UK, or in the case of businesses, are not incorporated in the UK.

NETPs (non-established taxable persons) do however, have to comply to different VAT rulings than UK natives. Your buyer may need to check these differences out before completing any purchase.

 

Can I sell a business as a going concern if I’m not registered for VAT?

This is possible in some scenarios, such as when the seller is operating beneath the registration limit.

The sale of a non-VAT-registered business that includes an amount of stock valued at a price that would otherwise take it over the VAT threshold is still permitted. This is due to the fact that the stock is treated as a TOGC and not supplies.

 

Carry on trading till the deal is complete

Even if a deal is already agreed, you cannot stop trading until the new buyer officially takes over. Doing so will lose any going concern status that your business has. This may open you up to several tax obligations that a TOGC would ensure your exemption from.

As the seller of a going concern, it’s your responsibility to ensure the premises and assets are maintained in a proper fashion until the new owner takes over.

 

Review all contracts and legal actions

As the purchaser will be taking on every aspect of the business, you’ll need to make sure that you’re familiar with everything so you can clearly explain each running contract to them. For example, can the lease on your premises be transferred, or will the buyer need to renegotiate?

Any ongoing legal action against the company will also need to be disclosed. Responsibility for these will also transfer over. It’s considered good form to disclose any potential disputes that may arise in the future too.

Contracts should be reviewed with suppliers to ensure your business is receiving the best deal. Details of any work contracts should also be mentioned, so any buyers realise what the business is responsible for completing when they take over.

 

Steps to selling a business as a going concern

Seek advice

It’s worth seeking both legal and tax advice on selling your business before you take your first steps. As mentioned earlier, classifying a business as a going concern isn’t always as straightforward as it should be. It’s worth confirming this status beforehand to ensure your VAT exemption.

 

Be sure you can carry on trading

You will have to carry on trading right up to the handover of the business. Failure to do so could result in a breach of contract.

 

Perform your due diligence

Be sure to double check over what is actually for sale. Once checked, identify any potential stumbling blocks for buyers before they present themselves. While it’s the buyer that pays for and performs the due diligence process, the seller plays an active part in this. In some cases, the withholding of important information has led to the buyer seeking damages against the seller.

 

Sale of business agreement

The terms on this document must be agreed to by both the buyer and seller. It should also make clear that the company in question is being sold as a going concern.

 

Inform your staff

Legally, all staff affected by the sale (even if there’s unlikely to be any changes) must be informed. This can be done directly if you employer fewer than ten workers. Those with more than ten will have to inform an elected representative. This can be a trade union representative, or a member of staff that the rest of the workforce has chosen.

TUPE legislation regarding the protection of employment can be a complex subject to tackle. It’s strongly recommended that those transferring staff enlist expert help to do so as part of any sale.

 

 

Thinking of selling a business as a going concern? We can help

With so many legal and tax obligations to navigate, selling a business can seem like a potential minefield. We’ve helped countless owners to sell their businesses for the best possible price to carefully vetted buyers. Call us on 0800 975 0380, or email [email protected] for a free consultation to find out how we can help.