Key Takeaways
- Value reflects ongoing business profitability potential.
- Includes tangible assets, intangibles, and goodwill.
- Contrasts with liquidation value based on asset sales.
- Assumes company operates indefinitely, not liquidated.
What is Going-Concern Value?
Going-concern value represents the estimated worth of a business assuming it will continue operating indefinitely, incorporating both tangible and intangible assets alongside goodwill. This value differs from liquidation value, which assumes the business ceases operations and sells assets individually.
Accounting principles such as GAAS rely on the going-concern assumption to defer certain expenses and depreciation, reflecting ongoing business viability rather than forced asset sales.
Key Characteristics
Going-concern value encompasses unique elements that reflect the business's ability to generate future profits:
- Inclusion of Intangibles: Incorporates brand reputation, customer relationships, and identifiable assets beyond physical property.
- Goodwill Component: Represents the premium paid over net asset value for ongoing profitability potential.
- Future Profit Focus: Valuation centers on expected cash flows and operational continuity, not just current asset liquidation.
- Accounting Foundation: Supports methods like accelerated depreciation by assuming asset use over time.
How It Works
Going-concern value is typically calculated using valuation methods that emphasize the business’s ability to generate future income. The discounted cash flow (DCF) method is widely used, projecting future cash flows and discounting them to present value to capture ongoing earnings potential.
Other approaches include the cost method, which estimates replacement costs of assets adjusted for wear and obsolescence, and the market approach, which compares similar operating businesses. Intangible factors like workforce expertise and licenses also influence valuation under the going-concern premise.
Examples and Use Cases
Understanding going-concern value is essential in various financial contexts, including acquisitions and financial reporting:
- Airlines: Delta and American Airlines often reflect substantial goodwill in valuations due to their operational scale and brand strength.
- Growth Stocks: Companies featured in best growth stocks guides tend to have higher going-concern values because of their earnings growth prospects.
- Large-Cap Firms: Businesses listed among best large-cap stocks leverage established market presence contributing to robust going-concern value.
Important Considerations
When assessing going-concern value, be mindful that assumptions about future profitability and operational continuity critically impact valuation accuracy. Doubts about liquidity or imminent liquidation require disclosure per accounting standards but do not immediately negate going-concern status.
Investors should also recognize that going-concern valuations inherently involve assumptions sensitive to market conditions and company performance, making continuous monitoring essential for accurate financial analysis.
Final Words
Going-concern value reflects a business’s true worth based on its ongoing operations and profit potential, not just its asset liquidation. To leverage this, analyze projected cash flows carefully and consider consulting a valuation expert to ensure your assumptions align with market realities.
Frequently Asked Questions
Going-concern value is the estimated worth of a business assuming it will continue operating indefinitely, incorporating both tangible and intangible assets like goodwill to reflect its ongoing profitability potential.
Going-concern value assumes the business stays operational and values future earnings, while liquidation value assumes the business stops operating and sells assets quickly, often at discounted prices, excluding intangibles like brand reputation.
The going-concern assumption underpins accounting by presuming a company will meet its obligations and continue operations, allowing expenses and depreciation to be recognized over time rather than immediately.
Key methods include the Income Approach, which forecasts and discounts future cash flows; the Cost Approach, which estimates replacement cost of assets; and the Market Approach, which compares similar ongoing businesses.
Intangible assets like goodwill, brand reputation, and customer relationships add significant value to a going concern, reflecting the premium a buyer pays for an operational and profitable business beyond its physical assets.
Auditors must disclose substantial doubt about a company’s ability to continue as a going concern if liquidity issues or other factors threaten operations within one year, even though valuation remains on a going-concern basis until liquidation becomes imminent.
In real estate, going-concern value combines the property’s value with the ongoing business operations conducted there, reflecting both asset worth and profitability potential as a continuing enterprise.
