Understanding Going Concern Value for Successful Business Transfers

Going concern value is a crucial concept in business, especially when it comes to transfers. It refers to the value of a business as a going concern, meaning it's a viable and ongoing operation.

A business with a high going concern value is one that's expected to continue operating and generating revenue in the future. This is in contrast to a business that's being sold for its assets, which is known as a liquidation value.

The going concern value is typically higher than the liquidation value because it takes into account the business's potential for future growth and profitability. For example, a business with a strong brand and loyal customer base may have a higher going concern value than one with outdated equipment and a declining market share.

Ultimately, understanding going concern value is essential for successful business transfers, as it helps buyers and sellers determine a fair price for the business.

Discover more: Pronounce Concern

Going concern value is a value that assumes a company will remain in business indefinitely and continue to be profitable. This is also known as total value.

Going-concern value is the idea that a company will continue to be in business and be profitable. It's a concept that's often higher than the liquidation value, which is the value of assets if they were to be sold quickly.

The difference between going-concern value and liquidation value is known as goodwill. Goodwill is a valuable asset that represents the extra value a company has beyond its tangible assets.

A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business. This is because going-concern value is often higher than the liquidation value.

Here's a summary of the key points about going-concern value:

To determine if a company has a going concern value, we need to consider its ability to continue operating for the foreseeable future. This means the company must be able to meet its financial obligations and generate sufficient cash flow.

The company's financial position is a key factor in determining its going concern value. A company with a strong balance sheet and a history of profitability is more likely to have a going concern value.

A company's management and board of directors play a crucial role in ensuring its going concern value. They must be able to demonstrate a clear plan for the company's future and a commitment to its long-term success.

Suggestion: Going Concern Concept Accounting

Going Concern conditions are not clearly defined in GAAP, which leaves room for interpretation.

The Generally Accepted Auditing Standards (GAAS) requires an auditor to verify an entity's ability to continue as a going concern.

Without significant information to the contrary, it's always assumed that an entity will meet all its obligations without significant debt restructuring.

This assumption is based on the fact that an entity will continue to be a going concern entity.

Defaults on loans can create substantial doubts about a company's ability to continue as a going concern.

Lawsuits against a company can also raise concerns about its long-term viability.

Company plans to declare bankruptcy are a clear red flag for auditors.

Continued losses year over year can indicate a company is struggling to stay afloat.

In these cases, auditors may decide to qualify their audit report, which can raise questions about the value of a company's assets.

A company can choose to justify its decisions and try to convince the auditor that poor business conditions are only temporary.

However, if auditors are still unsure, they may suggest writing down the value of assets from their carrying value to their liquidation value.

A third-party guarantee can be used to mitigate existing risks, but it's not a guarantee that the company will be able to recover.

A unique perspective: Krugerrand Value by Year

If the circumstances of a business clearly indicate that there are going concern issues, there are some options available to mitigate an auditor's view of its going concern status.

One option is to obtain a guarantee from a third party, such as a corporate parent, to cover the debts of the business. This can resolve the going concern issue if the parent entity is in a sufficiently reasonable financial condition to cover the debts of its subsidiary.

Obtaining funding is another option to consider. If you can secure additional funding for the business, the auditor is reasonably assured that it will remain functional during the one-year period stipulated by GAAS.

In some cases, small business owners may put in extra funding for the necessary period and then take it back out once the funding period is over. This can be a viable solution to address going concern issues.

Here are some common approaches to obtain funding:

To determine if your business is a going concern, you need to understand its financial health. Does your business have sufficient cash flow to pay bills when they fall due, repay creditors, and cover unexpected costs?

A good indicator of this is whether company assets outweigh company liabilities on your balance sheet, also known as the debt to asset ratio. This is a crucial aspect of assessing a going concern.

You should also calculate your gross profit - are you making a loss after deducting expenses and costs? This will give you a clear picture of your business's financial performance.

After carrying out a health check on your business, supported by your accountant or a licensed insolvency practitioner, you will be able to determine if your business is a going concern or requires additional support in the form of commercial finance or a formal insolvency procedure.

The going concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns.

Liquidation value, on the other hand, is relevant to a situation where the company becomes insolvent and is unable to pay its bills. An insolvent company may choose to sell its assets one by one or all of its assets together.

The value received from the sale is usually the asset's market value, less sale expenses. Liquidation value is very important for creditors and stakeholders, who would be paid out of this money.

Liquidating a going-concern company can result in a bad reputation for the investors, which can have negative ramifications not only for the laid-off workers but also for the investor who made the decision to liquidate a healthy company.

Liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company's tangible assets and such of its intangible assets as can be sold, such as IP.

A company's value as a continuing concern is often higher than its value upon liquidation, making going-concern value more expensive than liquidation value.

The going-concern value is determined for an active business, whereas liquidation value is taken into account after the firm has ended its operations, typically when it is sold.