Going Concern Businesses

Advantages and Disadvantages of a Going Concern

Many new business owners decide that purchasing a going concern is an easier way to get into a certain market. Buying a business that is already in operation allows you, quite simply, to step into the shoes of the current owners and continue to run the business as it is currently being run.

In reality, it is not quite as simple and there are multiple additional considerations that come into play when purchasing a going concern.

Process of Buying a Going Concern

If you are certain that you wish to purchase a going concern, then one of the largest restrictions will be what businesses are currently available for purchase in that particular market sector. Typically, when a business is sold, the vendor sells absolutely every part of the business.

In the case of a limited company, this transfer can be completed by selling the shares. Basically, the owner of the shares is the owner of the business and every asset within the business, including any branding or goodwill that has been generated.

Another possibility is to purchase the raw assets. This is often a cheaper option, but has the potential downside that the goodwill and branding is not necessarily transferred. Therefore, the new business may not prove as successful as you had initially projected.

Every aspect of the transfer will have to be negotiated individually, including the assets, the branding, even the employees. This requires the assistance of a legal professional and this is an additional cost that should be considered as essential to ensure that all aspects are covered.

One of the major issues that you will be required to deal with when purchasing a going concern is the transfer of employees. There are legal protections in place to ensure that employees cannot simply be made redundant when the business transfers.

Another aspect to bear in mind is that the company will have entered into contracts in its own name. This means that, on transfer of the company, the new owner becomes a party to the contract and you will be bound by the terms and conditions. Although you may be able to renegotiate, in some circumstances, this should not be relied upon and, if it is essential, should be noted as a condition precedent for the transfer.

With a particularly complicated business, it is worth considering entering into an agreement to maintain the expertise of the vendor (or the key management individuals) for a period after the sale has gone through, in order to allow for a smooth handover.

Summary

 Buying a going concern is not always the easy option that it may first appear to be;

 Financially, it is usually more costly to purchase a going concern, but this is often reflected in the value of the goodwill that has been generated in the business;

 Bear in mind that, as the new business owner, you will take on the rights and liabilities into which the company has previously entered, whether they are desirable or not; make sure you seek legal advice on what this means, exactly, so that you can budget and act accordingly.