Investment Value of a Business as a Going Concern

Business Value as a Going Concern
Business Value as a Going Concern. PhotoAlto/Ale Ventura/Getty Images

Business Valuation Principles Explained

Businesses must be valued periodically for a variety of reasons. Businesses may also be valued in several different ways. For example: 

  • A business may be valued based on the sale  of its assets, both tangible and intangible. In this type of valuation, the fair market value of each asset is determined by an appraiser. Depending on the process of selling the assets, this type of valuation may result in a minimal ("fire sale" or liquidation) value for the assets. A liquidation is often part of the process of a Chapter 7 bankruptcy.
  • A business may also be valued in a different way, based on its continued operation. This valuation results in a much higher value, called "investment value." 

Business Value as a "Going Concern"  

If a business is being sold as a whole to an investor, investment value is the value of the business based on return on investment. Sometimes this is called "going concern" valuation.

A "going concern" valuation is the value of a business that is ongoing and open for business, with no expectation that it will close. A going concern is well-managed, with a solid customer base, and it continues to be profitable year after year. It has brand identity and a competitive position in the market, and its products or services are recognized as high quality. The company has a marketing presence and advertising campaigns that continue to bring in customers.

A going concern can pay its bills without resorting to high debt.

If it is a public company, a going concern has increasing share price and dividends to attract investors. 

Investment valuation or "going concern" valuation is in many cases the highest valuation of a business.

The Opposite of a Going Concern

Looking at the coin on the other side, a business may be operating, but it may not be as valuable as a going concern, for a number of reasons: 

  • It may have taken on too much debt and not be able to support that debt with earnings
  • The company may have cash flow problems
  • Some serious legal issues or litigations may be facing the company, which might result in significant payments
  • The company's revenues may not be growing, or new products are not being created with new revenue streams
  • The market may be changing, due to overseas competition or change in demographics of customers.

Any or all of these issues might converge on the company, resulting in losses and possible bankruptcy. Which brings us back to liquidation value of the business. 

 

Back to Business Valuation Standards/Methods Listing