What is Going Concern Value?

Going concern value is the amount that a potential acquiree is worth to a buyer under the assumption that the business will continue in operation for the foreseeable future. This is the default valuation assumption for a business. The assumption of continuing operations is critical, for it implies that the business will continue to have a base of customers that will continue to buy from it, employees who will continue to work there, licenses and permits that will continue to be in effect, and so forth. In short, going concern value is the ability of a business to continue to generate positive cash flows in the future.

The going concern value usually incorporates the following intangible assets:

Reputation and brand value. An established business often has brand recognition and a loyal customer base, which contribute to future earnings.
Intellectual property. These intangible assets can give the company a competitive advantage.
Employee skills. Trained employees and established practices enhance the company’s productivity and reliability.
Supplier and customer relationships. Long-term relationships can lead to favorable contracts and repeat business, which can be exceedingly valuable.

Impact of Going Concern Value on the Acquisition Price

Without the assumption of continuing operations, a business is essentially only worth its breakup value. Breakup value can be quite low, especially when there are few bidders for a firm’s assets. However, with the going concern assumption, an acquirer may be willing to pay much more for a business than the book value of its assets might imply. When paying going concern value, an acquirer would be willing to pay goodwill on top of the breakup value. Goodwill is based on a variety of intangible assets, including customer loyalty, intellectual property, customer lists, and the value of brands.

Example of Going Concern Value

As an example of going concern value, Questionable Corporation has a liquidation value of just $5 million. This amount is the current value of its office, warehouse, and inventory that can be sold if it were to be sold off in liquidation. Conversely, its going concern value is $25 million, which represents the ongoing cash flows that it can generate by remaining in business, with an operational brand and other intangible assets.