What Is Going-Concern Value?
Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. Going concern value is also known as total value. This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business.
- Going-concern value is the idea that a company will continue to be in business and be profitable.
- Goodwill is the difference between going-concern value and liquidation value.
- Going-concern value is often higher than the liquidation value.
How Going-Concern Value Works
The difference between the going-concern value of a company and its liquidation value is known as goodwill. Goodwill consists of intangible assets, such as company brand names, trademarks, patents, and customer loyalty. Typically the going-concern value will be greater than the liquidation value. When a company is acquired, the purchase price is typically based on its going-concern value. This means that a company being acquired can charge a pricing premium that is higher than the value of its assets and 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 typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns. The liquidation value of a company will even be lower than the value of the company’s tangible assets, because the company may have to sell off its tangible assets at a discount—often, a deep discount—in order to liquidate them before ceasing operations. Examples of tangible assets that might be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents, and other intellectual property (IP), furniture, and fixtures.
Liquidating a going-concern company can result in a bad reputation for the investors.
Usually, liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company’s tangible assets and such of its intangible assets as can be sold, such as IP. A company or investor that is acquiring a company may compare that company’s going-concern value to its liquidation value in order to decide whether it’s financially worthwhile to continue operating the company, or whether it is more profitable to liquidate it.
However, liquidating a company means laying off all of its employees, and if the company is viable, this can have negative ramifications not only for the laid-off workers but also for the investor who made the decision to liquidate a healthy company. Liquidating a going concern can give an investor a bad reputation among potential future takeover targets.
Example of Going-Concern Value
For example, suppose that the liquidation value of Widget Corp. is $10 million. This sum represents the current value of inventory, buildings, and other tangible assets that can be sold assuming that the company is completely liquidated. However, Widget Corp.'s going-concern value could very well be $60 million, as the company's reputation of being the world's leading widget producer and its ownership of patents and associated rights for widget production mean that the company should have a large and steady stream of future cash flows.