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Is Your Company a 'Going Concern'?
“Of course it is!” is what you’re probably thinking right about now. And chances are you’re right.
A "going concern" is accounting parlance, used to describe a company that can function without threat of liquidation for the foreseeable future, usually defined as the next 12 months. A going concern simply means that in the eyes of a professional, such as a CPA or certified business valuator, the company does not intend to liquidate or substantially scale back its operations. In other words, it is expected to continue business without interruption and meet its financial obligations.
Candidate for Liquidation?
While companies don’t plan to be in a situation where a forced liquidation occurs, the unexpected death or disability of the owner could trigger such a scenario. In the event of your, or a partner’s, untimely death, would your company become a candidate for forced liquidation? Maybe.
Here’s some questions to ask yourself. The more questions you answer “yes” to, the greater the chance your business could end up in a liquidation sale.
If you, or your partner, were to die or become disabled…
- Would a spouse (or other family member) become owner and/or control company’s stock?
- Would a spouse/family member be liable for the company’s debt, including any estate taxes due?
- Does a spouse/family member lack the executive experience needed to run the company?
- Would sales likely suffer in the short run?
- Would profits likely decline?
- Would key employees think about leaving?
- Would clients think about leaving?
When credentialed business valuators look at a business, one area they take into account is "goodwill." Goodwill is an intangible asset, comprised of the company’s reputation, its brand, customer base, intellectual properties, patents and other myriad things you can’t touch. A small business’s goodwill is usually only realized when a buyer purchases the company. Simply put, what a buyer pays above the fair market value of the net tangible assets is the company’s goodwill.
When looking at goodwill, a business valuator will take into consideration the people who work for a business. Does the company have a strong management team, are its employees experienced, and is there a low rate of employee turnover? These all contribute to the intangible value of goodwill. A company with strong management and dedicated, skilled employees will have more goodwill, and therefore be valued higher than a similar company that does not.
With that in mind, take another look at the questions above. Would your family, or your partner’s family, be able to rely on a strong management team and dedicated employees to keep the business running smoothly after a death? Would that same team be able to maintain sales, revenue and profits, while keeping customers on board? These are questions that a business valuator will ask, and your answers will have an impact on the amount of goodwill they will attribute to your company. Your answers may also be referenced in the final valuation report they deliver — a report that you would most likely share with investors, lenders, advisors, potential buyers and family.
Circling back to the start, yes, your business probably does meet the technical definition of a going concern. At the same time though, you want to make sure your company also isn’t at risk for liquidation.