What Does ‘Going Concern’ Mean In Business?

Contents

‘Going concern’ is a term that relates to the sale of a business. If you’re selling a business as a going concern, then the sale includes all aspects of the business that are required to keep it functioning as it were prior to the sale occurring.

In this article, we’ll look at going concern sales in business as well as the following:

The meaning of going concern
How a sale of business usually works
Paying GST
Business Sale Agreements
Misleading and deceptive conduct
Share sale and asset sale
Employee concerns
Selling a franchise

What Does ‘Going Concern’ Mean?

If you’re purchasing a going concern business, then you are not purchasing just a singular aspect of the business. The whole point of selling a going concern business is so that the former owner will continue running the business until the day of the sale.

After that, the new owner will take over. Everything the business needs to continue operating is included in the sale, such as trade marks, property, employees, contracts and other aspects.

How Does A Sale Of Business Work?

When a business owner decides they are ready to sell their business, they usually start by valuing their business. This will include looking at the business’ net worth, investments and comparing it to other businesses in the same market.

Once the value has been established, sellers can start to find potential buyers (many looking to purchase choose to engage a business broker). After a buyer has been found, the sale will be negotiated and a contract prepared.

Tax obligations will need to be sorted at this point and payment made, after which ownership of the business is transferred.

Does GST Apply?

Generally, a 10% Goods and Services Tax (GST) is payable for the sale of a business (you can get this back through input tax credit).

However, there is an exception for the sale of going concern businesses where the 10% GST tax is exempt. In order for the sale to be free of its GST obligation, the following requirements need to be met:

It’s expressly stated in writing the sale is a going concern
There has been a form of payment for the sale and it’s not a gift
The purchaser is registered to pay GST
The original owner operates the business until the day of the sale
Everything needed for the businesses to function normally is included in the sale

If all these requirements are met, then your sale is considered a going concern and is exempt from paying GST.

Do I Need A Business Sale Agreement?

Yes, it is highly recommended to have a Business Sale Agreement when selling your business.

The agreement in a legally binding contract that lists all the important aspects of a sale. This is a great way to make sure the sale is protected and everybody is on the same page.

Selling a business is far more complicated than selling a regular item, therefore, it requires some thoughtful legal considerations to ensure everything goes smoothly.

A typical Business Sale Agreement will usually include:

The assets included in the sale
The purchase price
Pre-sale conditions
Post sale obligations of the seller
Warranties
Completion
Termination

What Should I Know About Misleading And Deceptive Conduct?

Misleading and deceptive conduct refers to actions, statements and even omissions made by the seller that leads a purchaser to believe a fact that is not true about the goods they are purchasing.

As the name suggests, it involves any statement or omission that is likely to deceive customers, ultimately leading them to purchase a good or service.

Misleading and deceptive conduct is against the law, according to the Australian Consumer Law, and businesses caught to be engaging in this kind of conduct will often face legal repercussions.

There are a wide range of acts that can constitute misleading or deceptive conduct. In order to avoid it, be transparent with your buyer and honestly answer all questions. Ensure you’ve covered everything they will need to know prior to signing a business sale of agreement with them.

Example
Jamie is selling their closing businesses to Tara as a going concern sale. In order to entice Tara to purchase her business, Jamie creates fake reviews online about her business to embellish about how well it’s actually doing.

This conduct is considered misleading and deceptive conduct. Jamie can face serious legal consequences.

How Do I Sell A Business?

When selling a business, it’s important to decide on the kind of sale you wish to conduct. There are two main ways to sell a business – asset sale and share sale.

A share sale refers to selling the company’s shares. As the company is its own legal entity, the majority shareholder owns the company however, the company continues to own their business and assets.

An asset sale, on the other hand, sells things the company has ownership of, including any intellectual property, client lists, trade secrets, business plans, land and stock. With an asset sale, control of the company’s assets will transfer from one person to another.

There are advantages and disadvantages of selling both assets and shares. It will ultimately depend on what you’re looking to achieve with the sale – if you’re looking for more advice, contact us today for a chat.

What Happens To My Employees When I Sell My Business?

It’s advisable to keep your employees in the loop about anything that is happening regarding a sale. This will allow them to either prepare for new ownership or potentially have to find alternative employment.

A going for concern sale will include the employees working for the business, so alerting your employees of a new owner is highly recommended. A new owner may decide to change the rules a bit, so employees should have ample time to prepare for that scenario.

Selling A Franchise

Selling a franchise refers to the sale of a branch of one particular store that belongs to a chain.

The sale of a franchise is different from selling a business that is not part of a franchise, as the Franchise Agreement will determine how a sale can be conducted (for example, whether the right of first refusal belongs to the franchisor or not).

Selling a franchise also involves consideration of a range of matters, as the capacity of a franchise will depend on what the franchisor allows.

In order to sell a franchise, you will need to inform the franchisor of your intention to sell, consult the Franchise Agreement and keep the franchisor informed about any decisions you make, given a sale is permitted by your agreement.

It’s also important to check the Franchising Code of Conduct, as it lists certain obligations for both parties in a Franchise Sale. For example, the Code provides that a buyer of a franchise has 14 days to review all the documents before they sign them.

If you’re unsure about your obligations under the Code when it comes to selling a franchise, feel free to reach out to our Franchise Lawyers.

Key Takeaways

A going concern sale of business is a great way to see your business live on even after you have stepped away from it. This type sale can be beneficial for all parties when conducted correctly, but it’s best to seek the help of legal professionals.

To summarise what we’ve covered:

A going concern sale means selling everything the business needs to operate in the sale
In a going concern sale, the business will continue to be operated by the seller until the day of the sale from which the buyer will run the business
GST is exempt from going concern sales as long as the criteria is met
Ensure you are honest with you buyers to avoid engaging in misleading or deceptive conduct
It is recommended to have a business sales agreement in place
Decide whether or not you would rather engage in an asset sale or share sale
Keep your employees informed about the sale
If you own a franchise, the sale process will look different to a regular business sale

If you would like a consultation on selling your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Sapna Goundan

Sapna has completed a Bachelor of Arts/Laws. Since graduating, she's worked primarily in the field of legal research and writing, and she now writes for Sprintlaw.

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