What it means
Every business owns things that can be listed and valued: premises, vehicles, stock, receivables. Going concern value recognises that a functioning company is normally worth more than the sum of those items, because it also has trained people, repeat customers, supplier relationships and processes that would take years and real money to rebuild.
The distinction becomes practical in a sale. A buyer paying going concern value is buying future cash flows, so the price is driven by earnings and growth prospects, whereas a buyer paying liquidation value is buying assets and cares about resale markets and disposal costs.
Valuers usually estimate going concern value through a discounted cash flow model or an earnings multiple, then compare that result against the net realisable value of the assets. If the trading value is lower than the break-up value, the honest conclusion is that the business is destroying value and should be restructured or wound up.
The same idea appears in accounting when one company acquires another. The excess of the purchase price over the fair value of identifiable net assets is recorded as goodwill, which is essentially the going concern premium given a place on the balance sheet.
A nuance worth holding is that going concern value is fragile in a way asset value is not. Key staff leaving, a licence lapsing or a single dominant customer walking away can collapse the trading premium almost overnight while the physical assets sit unchanged.
In practice
Real-world examples.
Example
A veterinary group is offered $4,000,000 for its two clinics as trading practices, while the equipment and leases alone would raise about $900,000 in a sale. The $3,100,000 difference is going concern value built on the client register and the vets who serve it.
Example
An insolvency practitioner takes over a failing printing company and continues trading it for six weeks to complete the order book. Selling the business as a going concern realises far more for creditors than an immediate auction of the presses would have done.
Example
A tax authority reviews an intragroup transfer of a distribution subsidiary priced at net asset value. It challenges the price on the grounds that a third party would have paid a going concern premium for the established distribution network.
Think of it
“Going concern value is what the business is worth alive and operating-not broken up and sold off.
Formula
Calculation
Going concern value = Value of the business as a trading entity, typically from a discounted cash flow or earnings multiple
Going concern premium = Going concern value - Net asset or liquidation value
A specialist engineering firm generates steady operating profit of $1,500,000 a year and sells on an eight times earnings multiple, giving a going concern value of $1,500,000 x 8 = $12,000,000.
Its identifiable net assets, being machinery, premises, stock and receivables less all liabilities, are independently valued at $8,500,000 on a fair value basis. The going concern premium is therefore $12,000,000 - $8,500,000 = $3,500,000, which represents 29% of the total value and reflects the order book, the skilled workforce and long-standing customer accreditations.
If the same assets were sold piecemeal in a forced sale at 70% of fair value, they would realise $8,500,000 x 0.70 = $5,950,000, so shutting the business down would sacrifice $12,000,000 - $5,950,000 = $6,050,000 of value.Case study
Seen in the real world.
Halbrook Fine Foods is a fictional speciality food wholesaler presented here as an illustrative case. Its founder wanted to retire and assumed the business was worth roughly its balance sheet, about $2,800,000 of vans, chilled storage, stock and debtors.
An adviser modelled the trading business instead and produced a going concern value of $6,400,000, based on $800,000 of sustainable operating profit and a multiple of eight. The premium of $3,600,000 sat almost entirely in supply agreements with 340 restaurants and a purchasing team that knew every producer personally.
The illustrative twist is what happened next. The founder's initial plan had been to sell the vans and the freehold separately to two different buyers, which would have destroyed the premium entirely, and the adviser's main contribution was persuading him to sell the business whole instead.
Watch out
Common mistakes.
- Equating going concern value with the balance sheet total, when the balance sheet excludes internally generated relationships, know-how and customer lists that often carry most of the value.
- Assuming the going concern value is always higher than liquidation value, which is untrue for businesses that earn less than the return their assets could produce elsewhere.
- Confusing the going concern assumption in accounting with going concern value, since one is a basis of preparation and the other is a valuation concept.
Questions
People also ask.
Is going concern value the same as goodwill?
They are close relatives, and goodwill is broadly the going concern premium as it appears on the balance sheet after an acquisition has been accounted for.
Who calculates going concern value?
Usually a valuer, corporate finance adviser or insolvency practitioner, working from forecast cash flows or maintainable earnings rather than historical book values.
Why do lenders care about the difference?
Because their recovery in a good outcome depends on the business being sold whole, while their worst case depends on the far lower liquidation value of the security they hold.
From the founder's library
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