Definition
Going-Concern Value refers to the value of a company as an operational entity rather than just the sum of its liquidated assets. This encompasses not just the physical assets of the company but also intangible aspects such as intellectual property, brand reputation, workforce efficiency, and industry relationships. The going-concern value often includes goodwill, which represents the premium paid over the fair market value of the assets due to these intangible benefits.
Examples
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Retail Chain Acquisition: When a larger retail company acquires a smaller chain, the price paid often exceeds the book value of the smaller chain’s tangible assets. This premium reflects the going-concern value, which includes established customer base, trained staff, supplier relationships, and brand reputation.
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Tech Start-Up Purchase: A tech behemoth purchasing a startup might pay more than the sum of the startup’s physical assets. This excess amount considers the innovative technology, patent holdings, talent pool, and market positioning of the startup, constituting the going-concern value.
Frequently Asked Questions
What is the difference between going-concern value and liquidation value?
The going-concern value includes the operational capabilities of a business and its potential to generate earnings, whereas liquidation value is solely the net cash that would be received if the assets were sold off individually and the business ceased operations.
How does goodwill relate to going-concern value?
Goodwill is an integral part of the going-concern value, representing the premium over the asset base due to the business’s intangible advantages. Essentially, goodwill is the reflection of the value created from the business structure, strong customer relationships, and brand strength.
Why is going-concern value important?
The going-concern value is crucial in mergers and acquisitions, financial reporting, and bankruptcy proceedings. It provides investors and stakeholders a clearer picture of the intrinsic value of continuing operations as opposed to merely the net assets.
Can a company’s going-concern value be negative?
No, while a company’s profitability may be negative, the going-concern value itself (which incorporates the potential for future earnings) is either positive or zero, as it inherently considers the potential cash flow and benefits of a live operating business.
Goodwill
An intangible asset representing the difference between the purchase price of a company and the fair market value of its identifiable tangible and intangible assets. Goodwill encompasses brand value, customer loyalty, and other elements that may not be individually quantifiable.
Liquidation Value
The net cash received if the assets of a business were sold off and the operations were ceased. This value is often considered in contrast to the going-concern value.
Intangible Assets
Non-physical assets such as trademarks, copyrights, patents, brand recognition, and goodwill that contribute to a company’s value.
Online Resources
Suggested Books for Further Studies
- “Business Valuation For Dummies” by Lisa Holton
- “Valuing a Business, Sixth Edition: The Analysis and Appraisal of Closely Held Companies” by Shannon P. Pratt and Alina V. Niculita
- “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels
Fundamentals of Going-Concern Value: Business Valuation Basics Quiz
### Does going-concern value include the tangible assets of a company?
- [x] Yes, it includes both tangible and intangible assets.
- [ ] No, it only includes intangible assets.
- [ ] Only tangible assets are considered.
- [ ] Going-concern value does not account for any assets.
> **Explanation:** Going-concern value includes both tangible and intangible assets. It assesses the business's value as a continuing operation.
### Which component is NOT part of the going-concern value?
- [ ] Customer relationships
- [ ] Intellectual property
- [x] Liquidation cost
- [ ] Trained workforce
> **Explanation:** Liquidation cost pertains to the process of ceasing operations and selling assets, whereas going-concern value is focused on the operational aspects of the business.
### What does goodwill represent in going-concern value?
- [ ] The cost of physical assets
- [ ] Short-term profits
- [ ] Long-term debt
- [x] Intangible benefits and value above net asset base
> **Explanation:** Goodwill represents the value attributed to intangible benefits, including brand reputation, customer loyalty, and other non-physical assets.
### Why is going-concern value often higher than liquidation value?
- [x] It includes future earnings potential and operational efficiencies.
- [ ] It accounts for the cost to liquidate assets.
- [ ] It deducts depreciation and amortization.
- [ ] It reflects only tangible assets.
> **Explanation:** Going-concern value includes future earnings potential and operational efficiencies, making it typically higher than liquidation value, which only considers the sale of tangible assets.
### Which type of value is more useful in assessing a company's future profitability?
- [ ] Liquidation value
- [x] Going-concern value
- [ ] Salvage value
- [ ] Depreciated value
> **Explanation:** Going-concern value is more useful in assessing future profitability as it reflects the company’s potential for generating future earnings in an ongoing operation.
### In what scenario is liquidation value more relevant than going-concern value?
- [ ] During an initial public offering
- [ ] In the case of business expansion
- [x] When the company is ceasing operations
- [ ] For a strategic acquisition
> **Explanation:** Liquidation value is more relevant when the company is ceasing operations and converting assets into cash, rather than continuing as a going concern.
### Which element does NOT contribute to the going-concern value?
- [ ] Brand reputation
- [x] Cash from liquidated assets
- [ ] Patents and trademarks
- [ ] Experienced management
> **Explanation:** Cash from liquidated assets pertains to liquidation value and does not contribute to the going-concern value, which focuses on operational aspects.
### How does going-concern value affect an acquisition deal?
- [x] It often increases the purchase price due to future earnings potential.
- [ ] It has no impact on the purchase price.
- [ ] It decreases the purchase price as potential risks are factored in.
- [ ] It equals the sum of the company’s tangible assets.
> **Explanation:** Going-concern value often increases the purchase price due to the optimistic view of future earnings and operational synergies.
### What represents a premium paid over asset liquidation value in acquisitions?
- [ ] Tangible assets
- [ ] Market capitalization
- [ ] Current stock price
- [x] Goodwill
> **Explanation:** Goodwill represents the premium paid over the asset liquidation value in acquisitions, attributable to valuable intangibles like brand and customer base.
### What aspect is NOT part of the calculation for going-concern value?
- [ ] Anticipated earnings
- [ ] Operational efficiencies
- [ ] Intangible assets
- [x] Asset disposal cost
> **Explanation:** Asset disposal cost pertains to liquidating assets, not to the going-concern value calculation, which focuses on ongoing business operations and potential earnings.
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