What is a Going Concern Business and How to Sell it: An In-Depth Guide

Selling a business as an ongoing "going concern" offers many potential benefits for sellers, from maximizing sales price to retaining staff. However, achieving going concern status involves thorough financial, operational, and legal due diligence. This guide examines going concern qualifications, advantages of selling this way, and actionable tips to transfer your business while maintaining its going concern status.

Evaluating Going Concern Status

According to Generally Accepted Accounting Principles (GAAP), a going concern business assumes operations will continue indefinitely. Specifically, it must have adequate cash flow to meet obligations over the next 12 months at minimum.

Maintenance of going concern status depends heavily on financial metrics:

  • Current ratio – Should exceed 1.0x (current assets/current liabilities)
  • Revenue and profit trends – Demonstrate stable or positive trajectory
  • Cash flow – Positive and sufficient to cover expenses
  • Debt levels – Manageable based on cash flow

Businesses in growth industries with historically stable demand like healthcare, education, and food/beverage tend to more easily maintain going concern qualifications.

As a business consultant, I evaluate clients‘ going concern status annually by reviewing the above factors. Addressing any deficiencies early allows sufficient time to implement corrections before a sale.

Benefits of Selling a Business as a Going Concern

Sellers who position their business as a going concern can enjoy several advantages:

  • Maximize valuation – Typically yields 20-30% higher valuation versus liquidation value.
  • Preserve operations – Avoids business interruption that loses customers.
  • Retain staff – Workers stay in place rather than finding new jobs.
  • Continue contracts – Ongoing contracts/relationships pass to the buyer.
  • Lower taxes – VAT exemptions on transfer of assets to buyer.

According to an HBS study, sellers emphasizing going concern factors achieved a 27% higher sale price.

For these reasons, I coach my clients early on best practices to maintain going concern status leading up to a sale.

Step-by-Step Guide to Selling a Business as a Going Concern

Successfully selling a business as a going concern involves careful preparation and execution across multiple factors:

Financial/Operational Preparation

  • Conduct audits – Thoroughly audit financial statements, inventory, fixed assets, IP, etc.
  • Evaluate status – Assess current going concern qualifications 6-12 months prior to sale.
  • Address weaknesses – Rectify any deficiencies like low cash flow or profitability.
  • Optimize performance – Enhance operations to maximize sales and profitability.

Structuring the Sale

  • Define all assets – Clearly specify all tangible and intangible assets transferring.
  • Maintain continuity – Require buyer to continue core operations relatively unchanged.
  • Set closing timeline – Prevent any halt in business activity leading up to closing.

Legal/Administrative Tasks

  • Choose buyer – Vet buyer is qualified and able to maintain operations.
  • Notify regulators – Inform all necessary agencies (tax authorities, permits, etc)
  • TOGC contract terms – Detail exactly what constitutes the "going concern" in the sale agreements.
  • Finalize due diligence – Get updated financials, valuations, and legal reviews before closing.

Closing the Transaction

  • Worker continuity – Keep staff employed through sale date to avoid work disruptions.
  • Asset transfer – Coordinate transfer of licenses, titles, properties, materials, etc. to buyer.
  • Clear communication – Notify clients, suppliers, creditors of sale and maintain business.

While the process involves many moving pieces, sellers who start planning 6-12 months out and enlist professional advisors can effectively execute a going concern sale. This transfers the business intact and maximizes return on years of hard work building the company.