Selling A Business As A Going Concern

Dan NailerLegal Assessment Specialist

Updated on 1st August 2024

Selling a business as a going concern offers distinct advantages for both the seller and the buyer. This approach allows the business to continue operating seamlessly under the new ownership, preserving its value and ensuring continuity.

In this article, we'll explore what it means to sell a business as a going concern, why understanding this concept is important, and guide you through the process to make your business sale successful.

What makes a business a going concern? 

A going concern is a financially stable business that is expected to continue operating for the foreseeable future, usually at least the next 12 months. Even if the business had financial problems in the past, it has now recovered and isn't at risk of shutting down.

Let's further discuss what constitutes a going concern and why it's important for your business.

Financial stability

A business is considered a going concern if it can meet its financial obligations and continue operations without risk of liquidation. This means the business:

• Generates enough money from its operations to cover its expenses, including debts and operational costs;

• Makes consistent, sustainable profits over time;

• Is not overburdened with debt.

Operational continuity

To be sold as a going concern, a business must show that it can continue its operations seamlessly under new ownership. This means:

• The business must be able to continue trading without significant interruptions, maintaining normal activities and keeping up with customer and supplier relationships;

• The sale should include all assets necessary for the day to day running of the business;

• All existing contracts, leases, and supplier agreements should be transferable to the new owner.

Key indicators of a going concern

When determining if your business can be sold as a going concern, key ratios that can indicate the financial health of your business include:

• Debt ratio

• Net profitability ratio

• Current ratio

Classifying a business as a going concern is rarely straightforward. Some businesses that meet the basic criteria may still not qualify, while others might meet the standards despite not ticking all the boxes. As such, it's important to enlist the help of professionals to support you, including a detailed financial analysis to make sure the business meets the going concern criteria.

Can I sell part of my business as a going concern?

You can sell part of your business as a going concern, but the part of the business being sold must be capable of operating independently. This means it should have its own assets, liabilities, and operational infrastructure that allow it to function as a separate entity.

The buyer must also intend to continue the same kind of business operations with the acquired part and all necessary assets, including equipment, inventory, premises, and contracts must be included in the sale. 

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

There are many benefits to selling a UK company as a going concern.

They include:

Higher sale price

A business sold as a going concern often commands a higher sale price compared to selling off assets individually. Buyers are typically willing to pay a premium for a business that is fully operational and generating revenue from day one.

Smooth transition

The continuity of operations ensures a frictionless transition from the seller to the buyer. This means there's no disruption in the business activities, which helps in maintaining customer relationships and preserving the business's reputation.

Employee security

Selling as a going concern provides job security for employees since the business continues to operate. This can boost morale and maintain productivity, as employees are not faced with the uncertainty of job loss.

Stakeholder trust

Continuing business operations under new ownership helps maintain the trust and confidence of stakeholders, including suppliers, creditors, and customers.

VAT benefits

For VAT-registered businesses, selling as a going concern can qualify for VAT exemption under the Transfer of a Going Concern rules. This means the sale falls outside the scope of VAT, which can result in significant tax savings.

Easier financing

Buyers often find it easier to secure financing for a business that is sold as a going concern. Lenders are more inclined to provide funds for a business that has a proven track record and continues to generate income.

Quick start for buyers

For the buyer, acquiring a business as a going concern means they can start operations immediately without significant setup time and costs. This can be especially advantageous for buyers looking to expand their operations or enter a new market.

Is it a risk for buyers?

Buying a business labeled as a going concern is usually less risky than buying one that isn't as it's less likely to run into problems soon and you can take over the business and keep it running without major disruptions.

For buyers, this typically means a lower-risk investment and a business that's ready to keep making money.

What is a negative going concern?

If a business is labeled as a negative going concern, it is in serious financial trouble and is expected to go bankrupt unless immediate action is taken. This situation can lead to a series of problems, including a bad credit score, difficulty getting loans, and increased pressure from creditors.

In such cases, there are several routes that business owners may consider, including:

• Selling business assets individually;

• Liquidation;

• Administration

• Pre-pack administration

• Merging with another business.

Each approach has its own implications and requires careful consideration. Consulting with legal and financial advisors is essential to make an informed decision.

Transfer of a going concern and VAT

Under certain conditions, the transfer of a going concern can qualify for VAT exemption if:

• The buyer has no intention of changing the type of company, e.g. from a café to a second-hand bookshop

• Both the seller and buyer are taxable organisations

• There is no significant gap in trading

• The business doesn't undergo a series of immediate consecutive transfers.

Assets involved in the sale must also meet specific criteria to be considered part of a Transfer of a Going Concern. They must be:

1. Capable of being transferred to another person who can continue business operations;

2. Capable of being taken over by someone else if the current owner were to die or retire;

3. Capable of being transferred to a new legal entity.

If all these conditions are met, the sale of the business's assets can qualify as a TOGC and be exempt from VAT.

Both the seller and the buyer should tell HMRC about the transaction and their intention to apply for VAT exemption under TOGC rules. This notification helps prevent any misunderstandings or disputes later on.

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

A TOGC can occur even if the buyer is a Non-Established Taxable Person (NETP). That is a buyer who does not have a permanent residence, a fixed place of business, or is not incorporated in the UK. Despite not being established in the UK, these buyers can still partake in a TOGC under certain conditions, including:

• Compliance with VAT rulings;

• VAT registration, even if they are a non-established taxable person;

• The business must continue operating in the same manner post-sale.

Can you still sell a business as a going concern if you're not registered for VAT?

If your business is not registered for VAT and you sell it as a going concern, the sale can still qualify as a Transfer of a Going Concern if the sale includes stock valued at an amount that would otherwise push the business over the VAT threshold. This is because the stock is considered part of the ongoing business rather than individual supplies.

If the buyer is already VAT registered or becomes VAT registered as a result of the purchase, the TOGC conditions can be met more easily.

For detailed guidance and to ensure compliance, it is advisable to consult with VAT specialists.

Operational considerations before the sale 

Uninterrupted operations

It is essential to maintain business operations up to the transfer date. Any significant disruptions can undermine the buyer's ability to continue running the business as it was before the sale. This includes keeping all systems, processes, and workflows intact until the handover is complete.

Defining and specifying assets

In the sale agreement, clearly define all assets being transferred and specify whether these assets are tangible (i.e. equipment, inventory, property) or intangible (i.e. intellectual property, trademarks, customer lists).

The transfer of a going concern contract should also explicitly state why the business is considered a going concern, detailing the business's financial health, operational stability, and the continuity of business activities post-sale.

Managing employee transfers

Ensure compliance with Transfer of Undertakings (Protection of Employment) Regulations (TUPE), which protect employees' rights when a business is transferred to a new owner. This includes maintaining existing employment terms and conditions.

How to prepare for the sale of a business as a going concern

There are steps you can take to maximise the value of the business before the sale and ensure a smooth transition, such as:

• Looking for ways to reduce costs without compromising quality;

• Ensuring you have positive cash flow;

• Paying off debts;

• Maintaining up-to-date financial records;

• Creating a comprehensive list of all business assets and their value;

• Addressing any operational bottlenecks;

• Ensuring all contracts with suppliers and customers are up to date and transferable to the new owner;

• Verifying that lease agreements for premises or equipment can be transferred or renewed under similar terms;

• Listing all potential liabilities, including pending legal issues, employee claims, and warranty obligations;

• Resolving any outstanding liabilities before the sale where possible.

What is the process for selling a business as a going concern?

Here's a simple guide to help you understand the process of selling a business as a going concern:

1. Get a professional valuation to understand the fair market value of your business;

2. List your business for sale on appropriate platforms and through business brokers;

3. Conduct thorough due diligence including reviewing all contracts, leases, and any potential liabilities;

4. Work with a corporate lawyer to draft a comprehensive sale agreement that clearly states that the business is being sold as a going concern;

5. Negotiate the terms of the sale with the buyer;

6. Maintain business operations up to the handover date;

7. Ensure that all assets, equipment, leases and contracts are transferred to the new owner;

8. Complete the financial transaction and officially hand over the business to the new owner.

Common challenges of selling a business as a going concern

Various factors and elements need to be considered when selling a business as a going concern. 

These include:

Maintaining operations

One of the primary challenges is keeping the business running smoothly until the sale is finalised.

Any disruption in operations can undermine the going concern status, making the business less attractive to potential buyers.

Handling due diligence

Due diligence is a critical part of the sale process, where potential buyers scrutinise your business's financial and legal health. Providing comprehensive and up-to-date information is necessary. Any gaps or inaccuracies can delay the process or even derail the sale.

Reviewing and transferring agreements

All existing contracts with suppliers, customers, and employees must be reviewed to ensure they are transferable to the new owner. This might involve getting consents or renegotiating terms.

Property leases in particular require careful handling to avoid legal complications that could impact the buyer's ability to operate the business.

Get expert help with selling your business

If you're looking to sell your business as a going concern, it's highly recommended to consult with legal, financial, and business advisors. These professionals can provide tailored advice and make sure all aspects of the sale are handled efficiently.

At Lawhive, our network of expert corporate lawyers is on hand to support you with selling a business as a going concern for competitive, fixed fees.

Contact us today to find out more and get a free, no-obligation quote for the services of a specialist lawyer.