Taking over a going concern: the seven things to check

A going concern is distinct from the company itself. There are two situations: either the entrepreneur trades as an individual and sells his activity, or the activity sits inside a company and only the activity is sold.

1. What a going concern includes

A going concern is the whole body of movable assets and rights belonging to a trader that allow him to trade:

• the equipment, fittings and machinery;

• the employment contracts;

• the customer base;

• the right to the lease;

• the trading name;

• the accounting records.

Property assets — premises and buildings — are not part of the going concern, but may be sold at the same time. Likewise debts are not part of it, and remain the responsibility of the former operator or of the company that held the concern.

When buying from an individual seller, ask for a certificate confirming there are no debts: if debts do exist, the buyer risks being held jointly liable for them.

2. The audit

It has several strands. First the regulatory aspects, to be handled by specialists: a tax and accounting strand, one covering staff and employment contracts, and an audit of commitments and miscellaneous contracts.

Then everything connected to the trade itself: the reputation of the establishment, its strengths and weaknesses, the profile of its customers, how often they come back, and customer satisfaction, which can be checked through reviews online.

And the questions that concern you directly. Does the activity match what you enjoy? Will investment or refurbishment be needed, and on what budget? Do you feel able to sell these products, and to promote them?

3. Location and competition

What area do you cover? Is your competition confined to your street, your neighbourhood, your town, or wider? Might customers come from further afield?

If there are no competitors nearby, that may be excellent news. But it may also be because the local environment is unfavourable.

Are there plans that could affect how easily your shop is reached, for better or worse: pedestrianisation, a car park opening or closing, tram works, a shopping centre opening, a bus stop added or removed, a change to public transport timetables? Some of these can be checked with your local council or by following local news.

What is the business fabric around you? Service companies, industry, schools, public offices? That will affect your choice of opening hours and days, and your positioning.

In practice, the presence of competitors and of substantial commercial activity nearby is rather a good thing: it creates footfall, and the busier the better.

4. Customers and target

When you take over a going concern, you take over its customers too. It matters to know what kind of people come: students, tourists, young start-up employees, civil servants? You should be able to get access to your predecessor’s customer database, which could prove very valuable for a marketing campaign or for announcing your opening.

Then ask yourself whether the customers and the local residents are compatible with your idea. If you intend to shift the positioning, you will have to consider both the current customers and the people living nearby.

5. The staff

Employment contracts follow the going concern when it is sold, and employees keep all their rights and obligations.

The main point to watch is unwritten custom. A tolerance on one employee’s hours that caused no trouble before and no longer suits you. A habit acquired through long service. An informal hierarchy among the staff that stops you developing the team as you see fit. A holiday arrangement you want to change. And potentially a clash of temperament that makes working together difficult.

6. Financial history and cash

Turnover, balance sheets and financial results will tell you about the state of the trade. Get a specialist to help you analyse and understand the figures, and look at the accounts for at least the last three years.

But alongside the accounting side, pay attention to cash: it plays an important part. The trade is often subject to outside events and to seasons. Summer holidays and absent customers, stronger demand as the festive season approaches, payment terms with suppliers and customers.

7. Why is the seller really selling?

Sometimes it is simply retirement, early or otherwise, health problems, or a need for change. But try to dig, and to check that there are no other reasons: declining sales, trouble with staff, a competitor about to arrive.

Understanding the motives will help you decide whether the purchase makes sense, and if it does, will guide your choices for the business plan.

Nady Bilani