Going-Concern Value Definition Going-concern value is the total value a company has as an operating business—reflecting its ability to continue generating profits into the future. It incorporates both tangible and intangible elements, including expected future cash flows, brand strength, patents, and customer relationships. How it works
* The difference between a company's going-concern value and the value of its tangible assets if sold off is called goodwill. Goodwill captures intangible factors such as reputation, trademarks, proprietary processes, and customer loyalty.
* When a company is bought, the purchase price is typically based on going-concern value. Buyers often pay a premium above net tangible asset value to account for future profitability and intangible assets.
* Going-concern valuation commonly uses forecasts of future earnings or cash flows (discounted cash flow analysis) and comparisons with similar operating businesses.
Going-concern value vs. liquidation value
* Liquidation value estimates how much could be realized by selling a company’s tangible assets quickly, often at steep discounts. It generally excludes most intangible value.
* Going-concern value is usually much higher because it includes the value of ongoing operations and intangible assets.
* Investors use liquidation value when they believe a business will not continue operating profitably or when determining a floor value. However, liquidating a viable business can harm employees and damage an investor’s reputation among potential targets.
Example If Widget Corp.’s tangible assets sell for $10 million in a liquidation, that is its liquidation value. If the company is the leading widget maker with patents, strong brand recognition, and steady future cash flows, its going-concern value might be $60 million. The $50 million gap represents goodwill and the value of future earnings. Key takeaways
* Going-concern value reflects the worth of a business as an ongoing enterprise, including future earnings and intangible assets.
* Goodwill equals the difference between going-concern value and liquidation (tangible-asset) value.
* Going-concern value is typically higher than liquidation value; liquidation is used when continuity is unlikely or a minimum recoverable value is needed.
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