What Is Going-Concern Value?
Going concern value indicates the firm will stay profitable and in operation indefinitely. Total value is going to concern value. This contrasts with the liquidation value, as ongoing operations might continue to generate profits, adding to their worth. A corporation should always be regarded as a going concern unless it appears to be closing.
The Going-Concern Value Process
Goodwill is the gap between a company’s going concern and liquidation values. Companies’ brand names, trademarks, patents, and consumer loyalty make up goodwill. The going concern value usually exceeds the liquidation value. Acquisition prices are usually based on going-concern value. This means an acquired firm can charge a premium that exceeds its assets and accounts for future profitability, intangible assets, and goodwill.
Going-concern vs. liquidation value
Because it contains intangible assets, customer loyalty, and future returns, a company’s going concern value is usually higher than its liquidation value. A corporation may have to sell its tangible assets at a discount—often a steep discount—to liquidate them before closing, lowering its liquidation value. Equipment, unsold merchandise, real estate, automobiles, patents, IP, furniture, and fixtures might lose money.
A going-concern corporation liquidated might damage investor reputation.
Investors use liquidation value when they believe a firm no longer has value as a going concern and want to know how much it can collect by selling its tangible and intangible assets, like IP. A firm or investor acquiring a company may compare its going-concern value versus its liquidation value to determine if it’s more advantageous to liquidate or continue running.
Liquidating a firm implies laying off all of its employees, which can hurt the laid-off workers and the investors who let a thriving company go. An investor may lose credibility with future acquisition prospects after liquidating a company.
Example
Say Widget Corp. is worth $10 million in liquidation. Assuming total liquidation, this number indicates the current worth of marketable physical assets such as goods, buildings, and others. Widget Corp.’s going-concern value could be $60 million because the company is the world’s leading widget producer and owns patents and rights for widget production, ensuring a large and steady cash flow.
Conclusion
- Going-concern value assumes a firm will survive and prosper.
- The difference between going concern and liquidation value is goodwill.
- The going-concern value usually exceeds liquidation.
