Definition
Going Concern Value refers to the overall value of a business entity, including not only its tangible assets if liquidated, such as land, buildings, and equipment, but also intangible assets, such as its workforce, customer base, reputation, and operational synergies. This value acknowledges the premium often associated with a business that is actively operating, beyond the sum of its individual parts.
Examples
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Example 1: The Hyton Hotel Company has a going concern value of $100 million based on the market price of its stock. If the company’s tangible assets (land, buildings, and furniture) are appraised at $60 million, the remaining $40 million may be attributed to the value of intangible assets like its established reservation system and brand goodwill.
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Example 2: A manufacturing company might be appraised with specific tangible assets worth $1.5 million, but with an additional going concern value of $2 million due to long-standing customer contracts, a skilled workforce, and established supplier networks.
Frequently Asked Questions (FAQs)
What distinguishes going concern value from liquidation value?
- Going concern value includes premium valuation for operational aspects, such as customer base and workforce, whereas liquidation value solely considers the asset value if sold individually, often discounting intangibles and operational synergies.
Why is going concern value important in mergers and acquisitions?
- It provides a more comprehensive understanding of the true worth of a business entity being acquired, reflecting not just tangible assets but also ongoing operations’ profitability and potential for future earnings.
How is going concern value calculated?
- Calculating going concern value often combines appraisals of tangible assets and specialized techniques for valuing intangibles like patent income, expected future cash flows, and market comparables.
What role do intangibles play in going concern value?
- Intangible assets significantly boost the going concern value by including items like brand goodwill, customer relationships, intellectual property, and business know-how, adding layers of value unattached to physical assets.
Can going concern value decrease?
- Yes, the going concern value can decrease if the business experiences operational setbacks, such as loss of key customers, deteriorating market conditions, or negative shifts in public perception and brand value.
Related Terms
- Goodwill: The value derived from a business’s reputation, customer relationships, and other intangibles, which contribute to its going concern value.
- Liquidation Value: The amount that can be realized if a business is sold off piece by piece instead of as an operational whole.
- Intangible Assets: Non-physical assets that add to the company’s value, such as patents, trademarks, and customer data.
Online Resources
- Investopedia: Going Concern Value
- American Institute of CPAs
- SEC EDGAR Database – Research market prices and financial statements.
References
- Altman, E. (1993). “Corporate Financial Distress and Bankruptcy: A Complete Guide to Predicting & Avoiding Distress and Profiting from Bankruptcy.” Wiley.
- Damodaran, A. (2002). “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset.” Wiley.
Suggested Books for Further Studies
- “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc.
- “Financial Valuation: Applications and Models” by James Hitchner.
- “The Art of Business Valuation: Accurately Valuing a Small Business” by Gregory R. Caruso, JD.
Real Estate Basics: Going Concern Value Fundamentals Quiz
### What is the primary difference between going concern value and liquidation value?
- [ ] Going concern value assesses only tangible assets.
- [x] Going concern value includes operational factors and intangibles, while liquidation value considers only tangible assets sold off.
- [ ] Both values are always equal.
- [ ] Going concern value is relevant only for non-profit organizations.
> **Explanation:** Going concern value includes the entire value of a business, taking into account ongoing operations, workforce, market presence, and intangible assets. Liquidation value, on the other hand, represents the value of tangible assets if sold off piece by piece.
### What are some key components that contribute to going concern value?
- [ ] Only land and buildings.
- [x] Customers, workforce, market share, and credit lines.
- [ ] Only equipment and machinery.
- [ ] The resale value of inventory alone.
> **Explanation:** Key components that contribute to going concern value include a customer base, workforce expertise, market presence, and established financial and operational support systems.
### Which type of assets are included in going concern value that are not typically in liquidation value?
- [ ] Depreciable assets
- [x] Intangible assets like goodwill and customer relationships
- [ ] Physical inventory
- [ ] Office furniture
> **Explanation:** Intangible assets like goodwill, brand reputation, and customer relationships are included in the going concern value but are typically not considered in liquidation value.
### In the case of the Hyton Hotel Company, what makes up the $40 million beyond tangible assets?
- [x] Intangible assets like the reservation system and goodwill.
- [ ] Excess residual inventory.
- [ ] Unpaid taxes.
- [ ] Deferred maintenance costs.
> **Explanation:** The $40 million beyond tangible assets includes intangible assets like the reservation system and goodwill that contribute to the total going concern value.
### How are intangibles valued in the context of going concern value?
- [ ] By estimating their resale market value.
- [ ] By excluding them from balance sheets.
- [x] By evaluating expected future cash flows and the profit associated with them.
- [ ] Providing no added value.
> **Explanation:** Intangibles are valued by forecasting their future cash flows and profitability, which add significant layers to the overall business valuation.
### Why is going concern value important for investors?
- [ ] It helps in estimating daily operational expenses.
- [x] It gives investors a comprehensive picture of the total value of the business, including future earning potential.
- [ ] It strictly appraises only tangible assets.
- [ ] It portrays yearly maintenance costs.
> **Explanation:** Going concern value is crucial for investors as it provides a rounded picture that includes the ongoing business operations and future profitability, thus demonstrating the true worth of the investment.
### What might cause a decrease in a company's going concern value?
- [ ] Increasing rent costs.
- [x] Loss of key clients or operational failures.
- [ ] Acquisition of new customers.
- [ ] Upgradation of company’s infrastructure.
> **Explanation:** Loss of key clients, operational failures, or negative changes in market perception can lead to a decrease in a company's going concern value since these factors affect the total operational wealth and future prospects.
### Does going concern value include both tangible and intangible assets?
- [x] Yes, it includes both types of assets.
- [ ] No, it only includes tangible assets.
- [ ] It includes only financial assets.
- [ ] It includes neither tangible nor intangible assets.
> **Explanation:** Going concern value encompasses both tangible assets like real estate and machinery and intangible assets like reputation, brand value, and customer base, providing a full assessment.
### How would you identify the intangible asset value contributing to going concern?
- [x] By subtracting the appraised tangible assets from the market price of the entity.
- [ ] By evaluating only physical assets.
- [ ] By focusing solely on daily operations cost.
- [ ] By ignoring business goodwill.
> **Explanation:** The intangible asset value contributing to going concern is identified by subtracting the appraised total value of tangible assets from the market price or overall valuation assigned to the business entity.
### Why might going concern value be higher than the liquidation value?
- [ ] It doesn't take into account depreciation.
- [ ] Only considers liquid cash reserves.
- [x] It includes the additional worth of organizational structure, customer relations, and overall brand perception.
- [ ] It assesses based on short-term profitability.
> **Explanation:** Going concern value is usually higher than liquidation value as it incorporates the additional worth held in the operational efficiency, workforce stability, customer relations, and brand recognition which are benchmarked higher than isolated or part-wise asset sales.
