Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
If you’re running a business (or buying or selling one), you’ll probably come across the term going concern at some point - often when your accountant, bank, or a buyer’s lawyer starts asking questions that feel a bit intense.
Don’t worry - “going concern” isn’t just accounting jargon. It can affect the price of a business, how a sale is structured, whether GST is charged, what you need to disclose, and (importantly) your legal risk if things aren’t as stable as they look on paper.
Below, we’ll break down what “going concern” means in a practical, small-business-friendly way, where it matters most, and what you can do to protect yourself from day one.
What Does “Going Concern” Mean In New Zealand?
In plain terms, a going concern is a business that is expected to keep operating for the foreseeable future, and isn’t likely to shut down (or need to sell off its assets in a “fire sale” scenario).
You’ll usually hear “going concern” in two common contexts:
- Financial reporting/accounting: when preparing financial statements, businesses are generally assumed to be a going concern unless there’s evidence they can’t continue trading.
- Business sales: where the buyer is purchasing a functioning operation (not just a bundle of assets), often with staff, systems, supplier relationships, customers, goodwill, and ongoing revenue.
It’s helpful to think of it this way: a “going concern” sale is typically the sale of a living business, not just “stuff”.
If you want a quick foundational definition, the concept is also explained here: going concern.
Does “Going Concern” Mean The Business Is Profitable?
Not necessarily. A business can still be considered a going concern even if it’s having a tough season or is temporarily unprofitable - as long as it can still reasonably keep operating (for example, it has funding, manageable debts, and a plan to trade through).
On the flip side, a business can look “busy” but still not be a going concern if it can’t meet its obligations when they fall due (for example, overdue tax, creditors chasing payment, or ongoing cashflow shortfalls with no realistic fix).
When Does Going Concern Matter Most For Small Businesses?
For many NZ small businesses, “going concern” becomes a big deal when something changes - you’re selling, buying, expanding, restructuring, refinancing, or dealing with financial pressure.
Here are the most common situations where the going concern concept shows up (and where legal risk often follows).
1) You’re Selling Your Business
If you’re selling, describing the business as a going concern can affect:
- how you negotiate the purchase price (goodwill vs assets)
- the warranties you’ll likely be asked to give
- what you must disclose to the buyer (especially risks that could affect future trading)
- GST treatment (in some cases, a going concern sale can be zero-rated)
And importantly: if the buyer later alleges the business was not truly a going concern at the time of sale, disputes can escalate quickly.
2) You’re Buying A Business
As a buyer, you’re usually paying for the business’s ability to keep generating revenue after settlement. If the business can’t actually continue operating (for example, key contracts are ending, licences aren’t transferable, or the cashflow position is worse than disclosed), you can end up paying “going concern” money for something closer to a distressed asset purchase.
3) Your Accountant Raises A Going Concern Warning
Sometimes your accountant may flag “going concern” uncertainty in financial statements. That’s not automatically a death sentence - but it’s a sign to slow down and get across the legal and commercial risks early, especially if you’re taking on new debt, signing long-term contracts, or promising performance to customers.
4) You’re Under Financial Stress
If you’re juggling late payments, tax arrears, or pressure from creditors, “going concern” becomes more than a technical label - it becomes a practical question: can the business realistically keep trading?
At that point, you should get advice early (legal + accounting) because decisions made under pressure can create personal exposure for directors and owners.
Going Concern In Business Sales: Contracts, GST, And Due Diligence
When small businesses talk about “selling as a going concern”, they often mean: “the buyer is taking over an operating business and continuing to trade.” But legally and practically, you’ll want to be much more precise than that.
The Sale Agreement Needs To Match The Reality
In a business sale, the contract wording matters. Whether you’re buying or selling, you should make sure the sale documents clearly spell out what’s included, what’s excluded, and what assumptions both sides are relying on.
Most disputes happen when one side assumes something is included “because it’s a going concern”, while the agreement is silent - or says the opposite.
For example:
- Are key customer contracts transferring, or do they require consent?
- Are supplier terms continuing, or will the buyer need to re-apply?
- Are staff staying on, and what happens to accrued leave?
- What happens if a key lease can’t be assigned?
This is why it’s so important to use a proper Business Sale Agreement that reflects the actual deal (not just a generic template).
Going Concern And GST (Why You Shouldn’t Assume)
Going concern often comes up in GST discussions because, in certain circumstances, the sale can be zero-rated for GST (rather than charging 15% GST on top of the purchase price).
The catch is that zero-rating isn’t automatic. Whether GST is charged (and at what rate) depends on the facts and the way the agreement is drafted. Common requirements can include that the buyer is GST-registered (or required to be), the buyer intends to use the business to make taxable supplies, the parties agree in writing that the supply is of a going concern, the seller supplies all things necessary for the buyer to carry on the activity, and the seller carries on the activity up to settlement.
If you “assume” the sale is zero-rated, but the requirements aren’t met, you can end up with an unexpected tax bill (and a dispute about who wears it).
Your accountant should be involved here, but it’s also a legal drafting issue - because the contract usually needs to say the right things and allocate GST risk properly. (This section is general information only and isn’t tax advice - get advice from your accountant or an IRD-qualified tax specialist for your specific transaction.)
Due Diligence: Proving It’s Really A Going Concern
If you’re the buyer, due diligence is where you test whether the business is truly a going concern - not just in theory, but in day-to-day reality.
Due diligence commonly covers:
- financials (cashflow, debt, overdue liabilities, margins)
- key contracts (customers, suppliers, software, finance)
- employment arrangements
- property/lease arrangements
- compliance issues (health and safety, privacy, industry rules)
- disputes, complaints, and regulatory notices
It’s normal for buyers to ask for warranties about these topics - and normal for sellers to want to limit those warranties to what they can genuinely stand behind.
If you want a structured approach to this, a Legal Due Diligence process can help surface red flags before you’re locked into the deal.
The Legal Risks: Misrepresentation, Insolvency, And Director Duties
The going concern concept becomes legally risky when there’s a mismatch between what’s being presented and what’s actually happening in the business.
Here are the big legal pressure points we commonly see for NZ small businesses.
1) Misrepresentation During A Business Sale
If you’re selling, you need to be careful about statements you make (or allow others to make) about the business’s performance, future prospects, and stability.
Misrepresentation risk can come from:
- financial information that paints an overly rosy picture
- failing to disclose known issues (like a major customer leaving)
- marketing materials that claim revenue or profit levels that aren’t accurate
- informal promises made in negotiations that later turn out not to be true
Even if you didn’t intend to mislead, you can still end up in a dispute if the buyer relied on what was said and suffered loss.
It’s worth getting your head around the concept of misrepresentation because it comes up a lot in business sale conflicts.
2) Fair Trading Act Risk (Sales And Advertising Claims)
Separate to contract law, NZ consumer and trading rules can also create liability. If you’re making claims in trade (including about revenue, growth, or “guaranteed returns”), you need to be careful not to mislead or deceive.
For many business sale situations, this overlaps with Fair Trading Act obligations - especially where a broker is involved, or where the sale is marketed publicly.
3) Insolvency Risk And Continuing To Incur Obligations
If your business is under serious financial stress, “going concern” questions can overlap with insolvency issues.
A practical warning sign is when the business can’t pay debts when they fall due, and there isn’t a realistic plan to fix that quickly. At that point, you should pause before taking on new obligations or continuing “business as usual”.
In New Zealand, there isn’t a single “insolvent trading” rule in the same way some other jurisdictions frame it, but directors can face real exposure under the Companies Act 1993 - including for reckless trading (s 135) and for agreeing to incur obligations without reasonable grounds to believe the company can perform them (s 136).
If the situation is escalating, you may need advice about formal options like voluntary administration (or other restructuring approaches), because delay can limit your options.
4) Director Duties And Personal Exposure
If you operate through a company, it’s easy to assume the company “shields” you from everything. In reality, directors can still face personal risk if they breach director duties - particularly in financial distress scenarios.
This isn’t about scaring you - it’s about helping you manage risk early and document decisions properly. If you want to understand the risk areas, this overview of personal liability is a good starting point.
How To Protect Yourself (Without Slowing Your Business Down)
The good news is that going concern risk is usually manageable when you put the right legal foundations in place early - and you document key decisions properly.
Here are practical ways to protect yourself whether you’re selling, buying, or simply trying to keep your business stable.
1) Be Clear On What You’re Selling (Or Buying)
“Going concern” can mean different things to different people, so it helps to get specific. Before you sign anything, clarify:
- What assets are included (stock, plant/equipment, IP, customer lists)?
- What liabilities (if any) are being assumed?
- What happens to employees?
- What contracts must be assigned or renewed?
- Is the buyer relying on the seller staying on for a handover period?
If you’re negotiating heads of terms or early stage paperwork, make sure you understand when the deal becomes binding, and what conditions still need to be met. The difference between “we’ve agreed in principle” and “we’re legally locked in” matters a lot, especially where a business’s going concern status could change quickly.
This is where understanding an unconditional contract can help you avoid signing too early.
2) Put The Right Warranties In Writing (And Keep Them Realistic)
In many going concern disputes, the real fight is about warranties and disclosures.
As a seller, you’ll want to:
- avoid giving broad “everything is perfect” warranties that you can’t control
- disclose known issues clearly (and attach them to the agreement where appropriate)
- ensure any forward-looking statements are qualified, or removed
As a buyer, you’ll want to:
- ask targeted questions (and get the answers in writing)
- make key assumptions express conditions (where possible)
- ensure the agreement gives you remedies if something important is wrong
3) Don’t DIY Your Sale Documents
Business sale documents look straightforward until something goes wrong. The tricky parts are usually:
- risk allocation (who pays if X happens?)
- what happens between signing and settlement
- restraint of trade clauses
- handover obligations
- what counts as a “material adverse change”
These are exactly the areas where a generic template can leave you exposed.
4) Keep Your Ongoing Contracts Tight (So The Business Can Actually Continue)
A business is far more likely to be treated as a true going concern if its key relationships are stable and documented.
Depending on your business, that might include:
- customer terms and conditions
- supplier or distribution agreements
- employment agreements and contractor arrangements
- lease documentation and assignment provisions
If you’ve got a team, updated Employment Contract documentation can also reduce uncertainty for a buyer (and reduce your risk of disputes during a transition).
5) Look After Compliance That Buyers Commonly Check
Buyers often do “compliance due diligence” even for small businesses - and it can affect both price and confidence.
Two areas that often trip businesses up are:
- Privacy: if you collect customer information (names, emails, addresses, health info, CCTV footage, etc.), you’ll usually need a fit-for-purpose Privacy Policy and good internal practices under the Privacy Act 2020.
- Health and safety: if you have a physical workplace, vehicles, machinery, or staff on-site, you need appropriate health and safety systems under the Health and Safety at Work Act 2015.
These aren’t just “tick-box” items - they can become real liabilities if something goes wrong after settlement and the buyer claims the risk was hidden.
Key Takeaways
- A going concern is a business expected to keep operating in the foreseeable future - it’s not automatically the same thing as “profitable”.
- Going concern issues often come up when you’re buying or selling a business, refinancing, or facing financial pressure.
- In a sale, the contract needs to clearly match the reality of what’s being transferred (assets, contracts, staff, leases, and liabilities), and GST outcomes should never be assumed.
- The biggest legal risks around going concern are misrepresentation, misleading claims made in trade, and disputes about what was disclosed before signing.
- If you’re under financial stress, going concern questions can overlap with insolvency risk and director duty risk - getting advice early can protect both the business and the people behind it.
- The best protection is strong legal foundations: clear sale documents, realistic warranties, proper due diligence, and up-to-date employment and compliance documentation.
If you’d like help buying or selling a business, or you’re not sure how “going concern” applies to your situation, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
