In the preparation of financial statements there is an assumption that investors seem to misunderstand. It is the “going concern” concept.
An auditor is required to satisfy themselves that the business will continue to operate for at least 12 months. The reason behind that requirement is that the assets recorded may have different values if they cannot be used in the operation of the business.
Inventories could be worth 10 cents on the dollar in liquidation. Goodwill would be worth nothing. Specialized equipment could have negative value. Even accounts receivable would diminish in value. Liabilities on the other hand tend not to go away, at least until the bankruptcy.
Auditors invariably assess things like adequate casualty insurance and business interruption insurance. Would there be enough money to meet ongoing obligations and to rebuild the lost property?
What of licenses required to operate. I saw a prospectus for Caesar’s Place decades ago. It stated that they were licensed by the Nevada State Gaming Authority and loss of such license could adversely affect their business. Ya think?
Another disturbing area is the “dominant customer” problem. If 60% of your sales are to a single customer, you better know you can keep them and that they are solvent too.
In owner-managed businesses, there is another concern that seldom arises in public companies. The owner is necessary to make the business go. They are necessary to guarantee a “going concern.” Key person life insurance is crucial. Critical illness insurance and disability insurance would be useful if death is avoided.
Money won’t run the business but it might buy enough time to find someone who could. You owe it to your family, your employees, your lenders, your customers, suppliers, landlords and the community.
Give it some thought. If you decide to say “No,” be sure that you can attach a reason to that answer. Don’t leave the stakeholders insurance poor. They have no way to work it out.
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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.