What is the going concern value?
The going concern value is a value that assumes that the company will remain in business indefinitely and continue to be profitable. The going concern value is also known as the total value. This differs from the value that would be realized if its assets were liquidated – the liquidation value – as an ongoing operation can continue to generate a profit that adds to its value. A company should always be considered a going concern unless there is good reason to believe that it will cease operations.
The central theses
- Going concern value is the idea that a company will continue to be in business and be profitable.
- Goodwill is the difference between the going concern value and the liquidation value.
- The going concern value is often higher than the liquidation value.
This is how the going concern value works
The difference between a company’s enterprise value and its liquidation value is known as goodwill. Goodwill consists of intangible assets such as company brands, trademarks, patents and customer loyalty. As a rule, the going concern value is higher than the liquidation value. When acquiring a company, the purchase price is usually based on the company’s value. This means that an acquired company can charge an overcharge that is greater than the value of its assets and that takes into account the value of its future profitability, intangible assets, and goodwill.
Going concern value vs. liquidation value
The going concern value of a company is usually significantly higher than its liquidation value, as it includes intangible assets and customer loyalty as well as possible future potential returns. A company’s liquidation value will be even less than the value of the company’s property, plant and equipment, as the company may have to sell its property, plant and equipment at a discount – often at a large discount – in order to liquidate it before ceasing business. Examples of items of property, plant and equipment that can be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents and other intellectual property (IP), furniture, and home furnishings.
The liquidation of a going concern can create a bad reputation for investors.
Usually liquidation value is used when investors think a company has run out of value and they want to know how much they can get by selling the company’s tangible assets and realizable intangibles, such as IP. A company or investor who acquires a company can compare the going concern value with its liquidation value to decide whether it is financially worthwhile to keep the company running or whether it is more profitable to liquidate it.
However, liquidating a company means laying off all employees, and if the company is viable, it can have a negative impact not only on the laid-off workers, but also on the investor who made the decision to liquidate a healthy company. The liquidation of a going concern can give an investor a bad name among possible future takeover targets.
Example of going concern value
For example, suppose the liquidation value of Widget Corp. is $ 10 million. This sum represents the fair value of inventory, buildings, and other property, plant and equipment that can be sold assuming a complete liquidation of the company. The enterprise value of Widget Corp. but could very well be $ 60 million, given the company’s reputation as the world’s leading widget maker and possession of patents and related rights in widget production means the company has a large and stable stream of future cash flows.