What does it mean if a business is a going concern? (2023)

What happens when a business is sold as a going concern?

When a company is sold as a going concern it means the business is predicted to be able to operate for the following 12 months with no threat of liquidation or closure. The fact that it's regarded as a going concern is an important issue, particularly if the company has been struggling financially.

Examples of Going Concern

A state-owned company is in a tough financial situation and is struggling to pay its debt. The government gives the company a bailout and guarantees all payments to its creditors. The state-owned company is a going concern despite its poor financial position.

The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.

For a company facing going concern difficulties, the fundamental financial statement risk is whether the financial statements have been prepared on the correct basis of accounting, or whether any significant uncertainties have been disclosed in the financial statements.

Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

The sale of a business as a going concern is different from a sale of assets, or a sale of shares or member's interest. The sale is called “a sale of a business as a going concern” because the business largely continues to run in the hands of the purchaser, as it ordinarily did before the sale.

Is a going concern good or bad? A going concern is considered good for the time being. It means your business is facing financial distress but is still able to make payments to keep it operating.

adjectivevery productive, profitable. advantageous. beneficial. fat. fruitful.

The concept of going concern is crucial to shareholders because it demonstrates the stability of the entity. This assumption can affect the stock price of the business and their ability to raise capital or draw in more investors.

What are the implication of going concern?

Going concern is one of the very fundamental principles of accounting. It assumes that the entity will continue to remain in business for the foreseeable future. Conversely, it also means that the entity does not plan to, or expect to be forced to, liquidate its assets.

If the company is not a going concern and the financial statements are prepared accordingly, management must disclose the fact, the reasons why and the basis on which the financial statements are prepared.

It is, therefore, the responsibility of the directors of the company to provide fair and accurate financial statements to ensure the going concern assumption is appropriate. Ultimately, there are three principles when dealing with an assumption: Assessing going concern. Review.

There must be an actual or current business operation. The sale of a dormant business or a business that is still to commence is not a going concern. Not only must the parties agree in writing that the business is sold as a going concern, but also that the purchase price includes VAT at the zero rate.

Requirements for the sale of a going concern

The seller must be a registered VAT vendor. The purchaser must be a registered VAT vendor. The property must be an income earning activity and the parties must agree in writing that the property will constitute an income earning activity on the date of registration of ...

A company that is not a going concern has gone bankrupt and liquidated its assets. The opposite of a going concern or profitable company may also be an unprofitable company.

The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations.

It is necessary for accountants to consider that a business entity will remain a going concern as an asset will be calculated for the profit it earns along with the depreciation it is charged, both of which are not restricted only for one accounting period. Hence, it indicates continuity in business.

"Going concern" is an accounting term used to describe a business that is expected to operate for the foreseeable future or at least the next 12 months.

What Happens When My Employer Sells My Place of Employment? When a business is sold, there is a technical termination of employment, even if you continue working the same job for the new employer.

Is going concern value higher than liquidation value?

The going-concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns.

Key Takeaways. When one company acquires another, the stock price of the acquiring company tends to dip temporarily, while the stock price of the target company tends to spike. The acquiring company's share price drops because it often pays a premium for the target company, or incurs debt to finance the acquisition.

Without it, businesses would not be able to perform accrued or prepaid expenses. The going concern principle allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognising them all at once.

The only employees who receive anything in this case are a few senior members of management who typically receive a small share (less than 10%) of the proceeds from the investors as an incentive to stick around and get the company sold. Seldom do rank and file employees ever see any money in this scenario.

If the purchasing entity does not wish to offer employment to existing employees, the employment will terminate during the transfer of business. In this case, the seller is obligated to pay employees their entitlements.

An acquisition is when one company takes over another company, and the acquiring company becomes the owner of the target company. In other words, the acquired company no longer exists following an acquisition since it has been absorbed by the acquirer. The equity shares of the acquiring company continue to trade.

The sale of a business as a going concern may be exempt with respect to GST purposes if the payment is made for the sale of the business, the purchaser is registered for GST, you have agreed in writing that the sale is of a going concern and you supply all things necessary for the continued operation of the business.

The owners of the company do, which in this case, the shareholders of the company get the money. When a company is sold off, you are essentially paying a price for the shares of the company.

To raise money for an expansion. To attract traditional lenders who are more likely to extend credit to publicly traded companies. To purchase other firms through stock shares instead of money.

How do you spot a buyout?