What is Going-Concern Value?
Going-concern value represents the concept that a company will continue its operations indefinitely and remain profitable. Essentially, it is the assumption that the business will not shut down and liquidate its assets. This contrasts with liquidation value, which calculates the potential worth of a company’s assets if they were sold off individually. Companies are generally presumed to have a going-concern value unless there’s clear evidence indicating they will cease operations.
Key Insights
- Continued Operations: Going-concern value assumes business longevity and profitability.
- Goodwill Component: The difference between going-concern value and liquidation value is often due to intangible assets, known as goodwill.
- Higher Value: Going-concern value tends to surpass liquidation value due to potential future earnings and intangible assets.
How Going-Concern Value Functions
The gap between the going-concern value and the liquidation value is attributed to goodwill, which encompasses intangible assets like brand names, trademarks, patents, and customer loyalty. Generally, the going-concern value exceeds the liquidation value. During acquisitions, companies are typically evaluated on their going-concern value. This valuation allows the seller to demand a premium, reflecting not only the tangible assets but also the value of future profitability, intangible assets, and goodwill.
Going-Concern Value vs. Liquidation Value
Combining Future Returns and Intangible Assets:
The going-concern value of a business is usually significantly higher than its liquidation value. This is because the former includes intangible assets and customer loyalty, alongside future revenue potential. Conversely, liquidation value is often lower due to the discounted nature of emergency asset sales. Tangible assets like equipment, inventory, real estate, vehicles, intellectual property (IP), furniture, and fixtures might be sold at a substantial loss.
Investor Perspectives:
Investors typically consider liquidation value when they believe the business is no longer sustainable. They seek to estimate the recovery value by selling tangible and sellable intangible assets like IP. During an acquisition, the acquiring party may compare a company’s going-concern value to its liquidation value to decide whether continuing operations is financially viable or if liquidation is more profitable.
Negative Consequences of Liquidation:
Liquidating a viable company can lead to severe consequences, such as mass layoffs, which can harm not just the workers but also the reputation of the investor opting for liquidation. Bad reputations can deter future takeover targets from engaging with the investor.
Illustrative Example of Going-Concern Value
Consider Widget Corp., whose liquidation value is $10 million. This amount stems from the current value of its inventory, buildings, and other tangible assets in the event of a complete sell-off. However, Widget Corp.’s going-concern value could potentially be $60 million. This substantial difference arises because of its strong market reputation, proprietary patents, and expected future earnings, illustrating the sustained revenue that could be generated if the company continues operations.
Related Terms: liquidation value, goodwill, intangible assets, tangible assets, business valuation.
