There are only two ways to buy a business – as a going concern or by a sale of shares. The latter is easy to understand – you buy the shares in the company from the Seller. Put another way – you buy the legal entity as is.
A going concern sale however works a little differently – you buy the business (together with its assets, clients, brand name, intellectual property etc.) out of its current legal entity and place it into a new and separate legal entity that you own. This is known as a going concern transaction.
Why do we so often recommend going concern transactions?
There are many reasons but the primary one is to allow the buyer to avoid any contingent liability in the business.
If you buy the shares of a company, you take over the legal entity, and become responsible / liable for that legal entity going forward – and backwards. It is this backwards in time responsibility that you want to avoid. No matter how thorough your due diligence or investigation of the business, it is possible that either a) you miss something or b) something unknown and unknowable crops up later.
The trouble is this – if you now own that legal entity – you also own the liability or problem within that legal entity
Doing a going concern transaction however allows you to avoid this unknown and possibly unknowable risk. Structured correctly the liability remains in the original entity and does not carry forward into your brand new legal entity.
Seen this way a ‘going concern’ transaction is a good risk mitigation strategy for you as the buyer of the business.