A going concern is a business entity assumed to have the resources and ability to continue operating indefinitely into the future. The going concern assumption is foundational to standard financial accounting and to most M&A valuation methodologies — it means the business is being valued as a productive, revenue-generating entity rather than as a collection of assets to be liquidated.
Going Concern in Accounting
In financial accounting, the going concern assumption underpins how assets and liabilities are recorded. Under International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), financial statements are prepared on a going concern basis unless management has concluded that the entity is likely to cease operations.
When auditors or management identify material uncertainty about going concern — typically due to recurring losses, inability to meet debt obligations, or loss of a major customer — this must be disclosed in the financial statements. A going concern qualification (or “qualified opinion” in auditor terminology) in a company’s accounts is a significant red flag in M&A due diligence.
Going Concern vs Liquidation Value
| Concept | Definition | When Used |
|---|---|---|
| Going Concern Value | Value of the business as a productive, operating entity | Standard M&A transactions, normal valuations |
| Liquidation Value | Net proceeds from selling all assets separately, paying all liabilities | Distressed M&A, insolvency, wind-down |
| Orderly Liquidation | Assets sold over a reasonable time period; achieves higher values than forced sale | Partial liquidation, estate planning |
| Forced Liquidation | Assets sold immediately under time pressure; achieves lowest values | Receivership, bankruptcy |
Going concern value almost always exceeds liquidation value — often by a significant margin — because the business generates ongoing cash flow, has customer relationships, trained staff, and operational infrastructure that would be expensive to replicate.
Going Concern in M&A
In the context of mergers and acquisitions, “going concern” has two distinct but related uses:
1. Valuation Basis
Most M&A transactions are priced on a going concern basis: the buyer is acquiring the business as an operating entity and paying for future cash flows, not just the net book value of the assets. This is why DCF analysis, EBITDA multiples, and comparable company analysis are the primary valuation methodologies in M&A — all three value the business as an ongoing generator of economic returns.
Enterprise value reflects going concern value: it is the total value of the business as a productive entity, including both the equity and the net debt that funds it.
2. Transfer of Going Concern (Tax)
In asset acquisitions — particularly relevant in Australia, the UK, and the UAE — the “Transfer of Going Concern” (ToGC or TOGC) is a tax classification that can exempt the transaction from GST/VAT if the business is sold as a functioning going concern (all assets necessary to continue operating are included in the sale). Mis-classifying a ToGC transaction has significant tax consequences; specialist tax advice is essential.
Going Concern Risk in Due Diligence
In due diligence, buyers assess going concern risk through several lenses:
Financial viability signals:
- Recurring net losses or negative operating cash flow
- Breach of banking covenants or inability to service existing debt
- Significant upcoming debt maturities with no refinancing in place
- Heavy dependence on one customer, one contract, or one market
Operational signals:
- Key person dependency — business cannot function without a specific individual
- Single-source supplier relationships with no alternative supply
- Technology or equipment approaching end of life with no replacement plan
A business with going concern risk will typically transact at a significant discount — or may only attract distressed buyers rather than strategic acquirers paying premium multiples.
Goodwill and Going Concern
Goodwill — the excess of purchase price paid over the net identifiable assets acquired — exists precisely because of going concern value. Goodwill represents the value of assembled workforce, customer relationships, brand, proprietary processes, and synergies that only have value in an operating business context. These elements would not exist in a liquidation.
Related Terms
Related Terms
DCF (Discounted Cash Flow)
A valuation methodology that estimates a company's intrinsic value by projecting future free cash flows and discounting them back to present value using a weighted average cost of capital.
EBITDA Multiple
A valuation ratio that expresses the enterprise value of a business as a multiple of its EBITDA — used in M&A to compare valuations across companies and assess whether a deal is fairly priced.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation — a widely used financial metric in M&A that measures a company's operating profitability before the effects of capital structure, tax policy, and non-cash accounting charges.
Goodwill
An intangible asset recognised on the acquirer's balance sheet when the purchase price of an acquisition exceeds the fair value of the target's identifiable net assets — representing the premium paid for factors such as brand, customer relationships, and expected synergies.