Going concern or scrap

Company Law Repository Winding Up


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 [2012] MLJU 1788, the judge cited a UK Supreme Court case law (Melon v Hector Powe Ltd [1981] 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

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.

1. Reputation

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 [2015] 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.

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 [1973] 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 [2016] 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

Ting Bee Ren

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