What Is Going-Concern Value?
I'm here to explain going-concern value directly to you—it's the total value a company could achieve if it keeps operating profitably forever. As a business owner or investor, you should know that this value factors in the company's ability to keep earning profits over time. It's different from liquidation value, which is what you'd get by selling off all assets right now. Unless there's solid evidence otherwise, always view a company as a going concern, not on the brink of shutdown.
Key Takeaways
- Going-concern value means the company stays in business and keeps making profits.
- Goodwill is what separates going-concern value from liquidation value.
- Going-concern value usually exceeds liquidation value.
How Going-Concern Value Works
Let me break this down for you: the gap between a company's going-concern value and its liquidation value is called goodwill. This includes intangible assets like brand names, trademarks, patents, and customer loyalty. In most cases, going-concern value is higher than liquidation value. When you're acquiring a company, the price is often based on this going-concern value, allowing the seller to add a premium that covers future profits, intangibles, and goodwill.
Going-Concern Value vs. Liquidation Value
You need to understand that going-concern value is generally much higher than liquidation value because it accounts for intangibles and future earnings potential. Liquidation value, on the other hand, is often less than the book value of tangible assets since you'd have to sell things like equipment, inventory, real estate, vehicles, patents, furniture, and fixtures at a discount to liquidate quickly.
Investors apply liquidation value when they believe the company has no future as a going concern and just want to cash out on sellable assets, including some intangibles like IP. If you're deciding whether to buy and run a company or liquidate it, compare these values to see what's more profitable. But remember, liquidating means firing everyone, and if the company was healthy, that can damage your reputation and make future deals harder.
Fast Fact
Here's a quick note: liquidating a going-concern company can tarnish an investor's reputation.
Example of Going-Concern Value
Take Widget Corp. as an example—suppose its liquidation value is $10 million, covering inventory, buildings, and other tangible assets sold off completely. But its going-concern value might be $60 million, thanks to its top reputation in widget production, patents, and the steady future cash flows that come with it.
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