Going-concern value
| Going-concern value |
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Going-concern value is a form of calculating value of the company. The company value can be calculated in many ways, e.g. a liquidation value is the value at which parts of company can be sold if it stop to operate. The going-concern value assumes that the company will continue to operate an be profitable for long period. Therefore, it is higher than liquidation price. The difference is the goodwill of the company.
Goodwill is comprised of trademarks, patents, owned technologies, customer contracts and loyalty, brand names, knowledge, etc. Those elements are sometimes included into assets on balance sheet, but their value is difficult to determine exactly. It depends on technology progress, quality of company products, corporate responsibility, etc. The distinction among the going-concern value of a business and its liquidation worth is known as goodwill. Generally the going-concern worth will be superior than the liquidation worth. When a business is vested, the acquisition value is typically leaned on its going-concern value. When one business buys different, the buyer typically repay again than the value of the purpose company's assets. The value premium results from goodwill, or the value of the company as a going affect. The disparity amongst going involve worth and liquidation worth conspires of imperceptible assets and goodwill. Going concern value is the worth of a business under the establishment that it will proceed to operate for the foreseeable futurity. This is in contrary to liquidation worth, which receives the concern is going out of business.
J.S. Rabianski comments on the definitions defined by the Appraisal Institute which according to the following definition of the continued value. The value of a verified real estate operation. Includes incremental value associated with the business concern, whicz is individual from the value of the real estate merely. Going - concern value contains an intangible enhancement of the worth of an operating business enterprise which is produced by the adjustment of the land, building, labor, equipment and marketing operation. Indicates that such a definition provides an understanding of the matter, but offers no hint about what to do. A definite numercial sample showing how to estimate going-concern worth and how it varies from a market value estimate would be a helpful addition to the literature (Rabianski J. S., 1996).
K.C.W. Chen, B.K. Church pointed out that both researchers and practitioners are concerned that market participants are interested in the auditor estimate of going concern, especially in light of the growing number of bankruptcies over the past decade (Chen K.C.W., Church B.K., 1996).
What does the current value of the company consist of?
Goodwill consists of:
Intangible assets:
- company mark names,
- trademarks,
- patents,
- rights for production,
- company's reputation,
- owned technologies,
- knowledge,
- customer contracts,
- customer loyalty.
Assets:
- value of inventory,
- buildings,
- other tangible assets.
Examples of Going-concern value
- Market Capitalization: Market capitalization is a measure of a company’s going-concern value. It is calculated by multiplying the current share price of the company by the total number of its outstanding shares. It is an indication of how much investors are willing to pay for the company as a whole.
- Book Value: Book value is the amount that is left when all of the company’s liabilities have been subtracted from its total assets. It reflects the net worth of the company and is a good indication of the company’s going-concern value.
- Earnings Multiple: Earnings multiple is a valuation method that takes into account the company’s future earnings potential. It is calculated by dividing the market capitalization of the company by its earnings before interest, taxes, depreciation, and amortization (EBITDA). The higher the multiple, the greater the company’s going-concern value.
- Discounted Cash Flow: Discounted cash flow (DCF) is a widely used method of valuing a company. It takes into account the company’s expected future cash flows and discounts them to present value. This is done to account for the time value of money and the risk associated with the company’s future cash flows. The higher the DCF, the greater the company’s going-concern value.
Advantages of Going-concern value
Going-concern value is a form of calculating value of the company. It is higher than liquidation price and takes into account the expected future profits of the company. The main advantages of going-concern value are:
- It takes into account the company's potential for future growth, which means that investors will be willing to pay more for the company.
- The value of the company is not affected by the state of the market, which makes it a more reliable measure of value.
- It gives an accurate measure of the company's current performance, which is useful for business planning purposes.
- It allows investors to compare the value of different companies, as the same criteria are used to calculate the value of each.
- It can be used to assess the impact of external factors on the company's value, such as changes in the economy, regulations, or competition.
Limitations of Going-concern value
- Going-concern value is difficult to determine as it involves making assumptions about the future performance of the company.
- The assumptions made when calculating the going-concern value may not be realistic or accurate, leading to an inaccurate value.
- Factors such as changes in the market, the economy, and consumer demand can affect the value of the company and are difficult to predict.
- There may be external factors, such as government regulations or changes in tax law, which can also have an impact on the value of the company.
- Going-concern values are also subjective, so different people may estimate different values for the same company.
- It is difficult to determine if a company is overvalued or undervalued based on the going-concern value.
- Replacement cost approach: This approach values the assets of the company based on the cost of replacing them if they were damaged or destroyed.
- Discounted cash flow approach: This approach values the company by taking into account the expected future cash flows. It takes into account the expected cash flows discounted back to the present.
- Income approach: This approach values the company based on the present value of its future income.
- Market approach: This approach values the company based on its market capitalization.
In summary, the going-concern value is one of the approaches for calculating the value of a company. Other approaches include the replacement cost approach, discounted cash flow approach, income approach and market approach. Each of these approaches have their advantages and disadvantages depending on the company and its situation.
References
- Chen K.C.W., Church B.K.(1996) Going Concern Opinions and Market`s Reaction to Bankruptcy Filing The Accounting Review, 71,1 p. 117-128.
- Oswald, L. J. (1990). Goodwill and Going-Concern Value: Emerging Factors in the Just Compensation Equation. BCL Rev., 32, 283.
- Rabianski J. S. (1996) Going-concern value, market value, and intangible value The Appraisal Journal, 64,2 p. 183.
Author: Sylwia Wierciak
