Why is it more worthwhile to sell the company as a going concern rather than selling the assets as scrap?
To discuss this question, we need to know what sale of going concern and sale of assets are as well as how these two different with each other.
Going concern is a business which is still operating. According to the Malaysia Guide on Transfer of Business as a Going Concern, transfer of business as going concern (TOGC) may involve the transfer of a whole or part of a business as a going concern, and in the case where only part of the business is transferred, that part of the business must be able to operate on its own. The Malaysia Guide on TOGC also illustrates that a mere sale or transfer of capital assets which does not result in the purchaser taking over the business of the seller does not come within the definition of TOGC. In Abdul Aziz bin Abdul Majid & Ors v Kuantan Beach Hotel Sdn Bhd & Ors  MLJU 1788, the judge cited a UK Supreme Court case law (Melon v Hector Powe Ltd  1 ALL ER) in which Lord Fraser stated that
‘the essential distinction between the transfer of business or part of a business, and a transfer of the physical assets is that in the former case the business is transferred as a going concern so that the business remains the same business but in different hands… whereas in the latter case, the assets are transferred to the new ownership to be used in whatever business he choose.’
Here are what the buyer can usually obtain through a TOGC, but not limited to these：
- tangible assets; (e.g.: premises, goods, facilities)
- intangible assets and (e.g.: company brand names, trademarks, patents and customer loyalty)
- future profitability
一家已出售了的持续经营企业为一家并不会在出售后停止营业。根据马来西亚持续经营业务转移指南，持续经营业务转移（TOGC）可能涉及整体或部分持续经营业务的转移，且在仅有部分业务转移的情况下，该部分业务必须能够独立运营。 马来西亚TOGC指南还说明任何购买或转移公司资产却不导致买房接手公司业务的情况并不归纳入TOGC的定义之中。在法庭判例Abdul Aziz bin Abdul Majid & Ors v Kuantan Beach Hotel Sdn Bhd & Ors  MLJU 1788中，法官引用了英国最高法院的判例 (Melon v Hector Powe Ltd  1 ALL ER) ，其中Lord Fraser说：
A TOGC can benefit the buyers more than transfer of mere assets. Sometimes, going concern is sold because it is not making profit due to improper management or wrongful investment strategy. So, some changes and improvements to the management level or business strategy can save the company and revive it. Since going concern always has well-established organizational structure, the effort to be put in to rebuild it is comparatively small. Now, we will look at each part of the transaction and how they are going to advantageous the buyers.
The going concern might have earned the society’s awareness alongside its business operation since establishment. This reputation and society’s awareness are transferred to the buyer when buying the going concern. In order to build up reputation, one needs time and excellent advertising, which can cost a lot. In a TOGC, the value of company’s reputation should be included in the selling price. Transfer of assets will not benefit the buyer in this way, so price should be lower considering the reduced value.
2. Trading Record
Buying an existing business, one can access to the company’s trade secret, its business networking and trade history. The information is widely applicable not only on the purchased business, but also other companies which the buyer might have owned.
3. Customer Loyalty
Long-established brand might have had groups of loyal customers already. This is different from the company’s reputation, loyal customers are those who keep coming back and consume, they are different with those who have heard of the company’s name only, this group of people are almost the guaranteed future income for the going concern even after transaction.
4. Skilled Workers
A competent team of employees is important to a company. Well-trained workers are assets of company because they make profit to the company and are used to the daily operation mode of the company. They can work and solve problems by their own even boss is away. To be realistic, if a company is compelled to be sold, there must be some problems inside the team, however to make correction on a mature group is much easier and more efficient than training all the newbies.
5. Complete and Established Business Operating System
This is the most valuable part of a going concern as it allows the buyer to continue operate the business without hesitation and that there is a successful track record for the buyer to make reference to. What is worth noting is that the TOGC puts the purchaser in a position of owning business (ALAM VENTURE SDN BHD & ANOR v ABDUL AZIZ BIN ABDUL MAJID & ORS  4 MLJ 270), not simply possessing an asset. For cases of sale of assets only, the buyer needs to figure out how to make use of these piecemeal assets and if they want to use them to run a different business, they will have to transform it to a new status. Many assets were set up for specific functions only, for example the railway track, some machines and plants, it is rather troublesome to do the transformation while in a TOGC, these assets can be put in service immediately.
这是持续经营中最有价值的部分，因为它使买方可以毫不犹豫地继续经营业务，并且有成功的过往业绩可供买方参考。值得注意的是，TOGC将买方置于拥有业务的地位 (ALAM VENTURE SDN BHD & ANOR v ABDUL AZIZ BIN ABDUL MAJID & ORS  4 MLJ 270)， 而不仅仅是拥有资产。而相对的在仅仅是出售资产的情况，购买者需要弄清如何利用这些零碎的资产且如果他们想使用它们来经营其他业务，他们将不得不将它们转换成新状态。许多资产被设定为仅有特定功能，例如铁轨，一些机器，进行转换较为麻烦，而在TOGC中，这些资产可立即投入使用。
Another benefit of buying going concern in Malaysia is the waiver of GST. Since the TOGC is neither a supply of goods nor a supply of services, hence nobody needs to bear the GST cost in a TOGC. Even though this does not directly increase the value of going concern, it still provides discount to the purchaser of going concern. Thus, it is worthwhile to both sides as no additional money goes to a third party in the form of GST.
When buying a going concern, everything comes together, meaning that not only the good name, the soft power among the business ecosystem and the complete operational system, the company’s debt liability, the contracts that formed prior to the transaction and even ongoing unprofitable business activities are included. Once taking over, the buyer is liable to every of the company’s issues as a legal owner (LAM SHES TONG & ORS v LAM KEE YING SDN BHD  1 MLJ 203). If the liability is not transferred, that means the entire business is not transferred because the liabilities cannot be separated from a going concern (DJ Auto Components Manufacturing Sdn Bhd v Fbk Systems Sdn Bhd  MLJU 1260).
购买持续经营时，所有利益与责任都将一同转移，这意味着不仅是好名声，商生态系统和完善运营系统之中的软实力，公司的债务责任，交易之前形成的合同，甚至是持续进行的无利润的商业活动皆被包含在内。一旦接手，买方将作为合法所有人对公司的所有问题承担责任（LAM SHES TONG & ORS v LAM KEE YING SDN BHD  1 MLJ 203）。基于责任与持续经营无法分割，倘若责任尚未被转移，这意味着公司业务的所有权并没有转移。（DJ Auto Components Manufacturing Sdn Bhd v Fbk Systems Sdn Bhd  MLJU 1260）。
As analyzed above, going concern value is typically higher than the sum of value of all assets. The difference of these two is known as goodwill. The goodwill makes it more worthwhile to be sold as a going concern than as assets, especially when the company’s market value is high. To evaluate a going concern value, we need to take into account all the elements listed above. The reason why selling the company as a going concern is more worthwhile than selling the assets as scrap is that going concern value are equal to the sum of the assets plus the goodwill.
Ting Bee Ren
University of Leeds