Going concern and liquidation value are accounting terms. Going concern looks to the total value of a successful business enterprise based on continued profitability. In contrast, liquidation value measures the net value of a company's tangible assets if it were to go out of business.
But what is the difference between going concern’s total value and the net value of liquidation value’s tangible assets?
What Is Going Concern Value?
According to the Corporate Finance Institute (CFI), going concern value assumes that the operating business will continue in the foreseeable future. The value of the company is based on the premise that all actions taken by the company are taken with the goal of running the company long term.
The company’s value is often based on intangible assets. One of these is customer loyalty. However, there are other intangible assets that contribute to a business enterprise’s valuation.
Going Concern Value’s Intangible Assets
Intangible assets are assets that are not physical in nature. A company’s intangible assets can contribute to its market value. There are several examples of intangible assets.
Intellectual property, like a patent or copyright, is considered an intangible asset. These assets contribute to the value of the company, but don’t have a physical nature.
A business enterprise’s management could also be deemed as an intangible asset. Intangible assets are listed on an accounting balance sheet.
Liquidation Value’s Net Value
When the value of a company plummets, its valuation may be dependent on its physical, also known as tangible, assets. If the company goes out of business, these tangible assets are sold.
CFI explains that liquidation value bases the value of a company according to the valuation of its physical or tangible assets. A business enterprise is generally liquidated when going through bankruptcy. It is usually a rapid sale process. The sale commences to pay off lenders
The liquidation value of the company is lower than book value, or its assets on a balance sheet. However, it isn’t as low as salvage value.
There are several items that are considered tangible assets.
Liquidation Value’s Tangible Assets
The book value of the tangible assets may or may not be enough to pay the lenders if a company becomes insolvent.
Tangible assets include real property, like buildings and machinery. Unfortunately, when liquidating real property, depreciation must factor into the equation. This could bring the business enterprise value.
Real estate is also considered real property. It usually needs to be appraised. Appraisers can be found through the Appraisal Institute.
Going Concern Value vs. Liquidation Value
The assumption when referring to going concern value is that the operating business will continue in the foreseeable future. Therefore, the value of its assets are based on intangible assets. In contrast, liquidation value is the value of a company if the physical assets were sold off due to ceasing operations.
In most cases, a going concern value will be worth more than liquidation value. That's because intangibles, like managerial skills and patents, could be worth more than real property.
Why and When You Need to Know Going Concern Value and Liquidation Value
- For lenders and shareholders: Lenders need to know the going concern value to determine if the business enterprise is viable for the long term. Likewise, a shareholder will also need to know the going concern value to determine investment potential.
- For bankruptcy: Liquidation value is important to know in the event of bankruptcy. Lenders will want to know the company’s real property’s total worth in anticipation of the tangible assets being sold. They will want to determine how far below book value the company’s assets are.
Performing both a going concern valuation and liquidation valuation is essential for valuating a company.
Anne attended University of Akron and went on to have a career in television sales. Working as a commercial property and casualty insurance agent for nine years allowed her to learn about different businesses' needs. She has also owned an advertising agency where she created marketing capaigns for various clients. Anne has written for several publications. She currently resides in Charleston, SC.