What Is A Going Concern?

Put simply, a going concern is an assumption that a company can satisfy its financial commitments and does not appear to be at risk of bankruptcy, liquidation, or descaling its operations. Often this time period where a company is not at risk of not being able to maintain its financial commitments is a minimum of 12 months.

Why Is Knowing If A Company Is ‘A Going Concern’ Important?

Accountants use the term ‘going concern’.  Where a status of going concern is not certain, a company must disclose this in their financial statements. Therefore the status of whether a company is a going concern influences how financial reporting documents are prepared.

Whether a company is a going concern or not is also a form of valuating a business, and impacts investor and creditor confidence.

How Is This Relevant For Buying Or Selling Businesses?

When a business is sold, it can be sold as ‘a going concern’ or not. If a business is sold as a going concern, then as well as for example assets, intellectual property and a lease being sold, everything else needed to keep the business running would also make part of the sale.

Where a business is sold as a going concern, the business needs to be run by the purchaser right until the day of settlement.

Buying a business as a going concern is often desirable for tax reasons. Importantly, when buying a business that is a going concern, the purchase is GST free. In order for the sale to be GST free the following must be met,

• the sale is paid for,
• the purchaser must be registered or already is registered for GST,
• both parties have included in their contract that the sale is of a going concern