In the absence of obvious signs of a pending liquidation, going concern is treated by most professionals as a forgone conclusion. They often do not consider the many facets of what constitutes a going concern, which includes an adequate workforce, operational plant and equipment, requisite licensing and permits, stable leadership, and a sustainable marketplace for the entity’s products or services.
While the assumption of a going concern rarely is second guessed – and rightly so – there are certain events that happen which should give a reasonable pause when it comes to the assumption of going concern. In the aftermath of the September 11th Terrorist Attacks there were many businesses directly and indirectly impacted by the attack which had to seriously consider their going concern reality. Likewise, portions of the Gulf Coast experienced a similar going concern dilemma following the Deepwater Horizon oil spill. In both instances business owners were seeking assistance from compensation funds to keep their businesses afloat.
Current events around the Covid19 pandemic have forced businesses around the globe to drastically change the way they operate. While these changes will likely be short term, the impact will reverberate for years to come. Some economic models are showing that the emerging going concern dilemma could last two to five years. As businesses attempt to reactivate or rehire their workforces, reestablish their supply chains, bring their plants and equipment back online and adapt to marketplaces that will be significantly different many will find their going concern assumption to be in jeopardy.
This will have ramifications not only for the organizations themselves but for their investors (or donors in the case of non-profit organizations) as well. Because of the nature of the going concern principle, this dilemma will impact the value of many firms, which will subsequently affect transactions such as mergers and acquisitions, ownership changes, and even divorce proceedings.
Owners, directors, and officers should start identifying the going concern risks and opportunities to their organizations now to better position themselves for the post-quarantine economy. This means not only assessing their own going concern but the going concern of suppliers, customers, and competitors as well. There are three key factors to consider in assessing the going concern of an organization:
- Determine whether the organization’s assets (including facilities, equipment, and workforce) are capable of offsetting liabilities (including long- and short-term debts) while generating a reasonable profit with growth potential. Do not simply rely upon prepared financial statements which only show the past. Identify the indicators and trends that predict how the organization will perform in the next 5-7 years.
- Assess the longevity and adaptability of the organization. Fixed contracts or the inability to diversify production output will severely hinder an organization from adapting to the changing economic conditions.
- Test the accuracy and completeness of your data to ensure it has not been manipulated. When dealing with highly motivated and/or invested stakeholders, the likelihood of manipulating or omitting data will increase because owners, officers, and employees attempt to protect the personal value they have at stake in the organization.
Finally, do not view the going concern dilemma as bad news. An event like this affords many opportunities for businesses to reevaluate their current policies and procedures, refresh their strategic plans, and diversify their operations to take advantage of the new opportunities that lay ahead.
What going concern issues are emerging for your business and your key customers and suppliers? Have you updated your strategic plan to take advantage of the post-pandemic economy?