Understanding and Maximizing Going Concern Value
What is Going Concern Value?
The term ‘going concern value’ refers to the total value of a business entity, which encompasses not just its physical assets if sold off separately, but also the additional premium that comes from the business functioning as a whole unit. This premium arises due to factors like established customer relationships, an operational workforce, market presence, and existing credit lines.
Components of Going Concern Value
Tangible Assets
Tangible assets include physical items like land, buildings, machinery, and furniture. These are comparatively easier to assess in terms of their market value.
Intangible Assets
Intangible assets encompass elements such as brand reputation, proprietary technology, customer lists, and goodwill. These elements add a significant amount of value to the business over and above the value of tangible assets.
Real-World Example
Consider the hypothetical ‘Hyton Hotel Company,’ which has a going concern value of $100 million based on the market price of its stock. Here’s a breakdown:
- Tangible Asset Value: The land, buildings, and furniture are valued at $60 million.
- Intangible Asset Value: Elements such as the reservation system and brand goodwill together add another $40 million to the company’s total value.
Strategies to Maximize Going Concern Value
- Enhance Customer Relationships: Strong and loyal customer relationships add considerable value as they assure a steady revenue stream.
- Optimize Operational Efficiency: Having streamlined operations maximizes profitability, thereby increasing the business’s appeal and value.
- Build Strong Brand and Goodwill: A reputable brand can command a premium price, contributing to higher going concern value.
- Leverage Market Position: A dominant market position can lead to larger market shares and greater business stability.
- Maintain Quality Workforce: Investing in employee satisfaction and retention secures productivity and contributes to overall business value.
Frequently Asked Questions
What is the difference between Going Concern Value and Liquidation Value?
While liquidation value refers to the worth of a company’s physical assets if sold individually, going concern value includes this and the augmented value from the company’s operational structure, including human resources, market positioning, and other intangible assets.
How are intangible assets valued?
Intangible assets can be valued using various approaches such as the income method (future earnings), the market method (comparison with similar businesses), or the cost method (replacement cost).
Why is going concern value important?
Going concern value is crucial because it provides a more comprehensive picture of a company’s worth, reflecting its true value in continued operation rather than just the sum of its parts if liquidated.
Related Terms: business valuation, goodwill, market value, tangible assets, intangible assets.
