Going-Concern Value

Core Description

• Going-Concern Value is the value of a business assuming it keeps operating and generating profits, not shutting down and selling assets piece by piece.
• It captures the "earning engine" created by customers, people, processes, contracts, permits, and brand, value that often disappears in liquidation.
• Investors, lenders, auditors, and M&A teams use Going-Concern Value to judge whether a company should be valued as an ongoing enterprise or measured against a wind-down outcome.

Definition and Background

What Going-Concern Value means

Going-Concern Value refers to the value of a business under the assumption that it will continue operating indefinitely and can keep producing earnings and cash flows. This is why Going-Concern Value is usually discussed as an enterprise-level concept: it reflects how the whole system works together, not what individual assets could sell for on their own.

Why it is more than "asset resale value"

A functioning company can often earn more than the sum of its parts. For example, a store network plus supplier terms plus trained staff can keep generating repeat sales. Separately, the fixtures and inventory may fetch far less. Going-Concern Value captures that premium from operating continuity.

The "going concern" idea in accounting and auditing

In financial reporting, most companies are treated as a going concern unless there is credible evidence of failure or shutdown. This matters because many accounting measurements (such as depreciation patterns, some impairment analyses, and classification of liabilities) implicitly rely on continued operations. When continuity is uncertain, disclosures and valuation assumptions often change quickly.

Calculation Methods and Applications

Method 1: Discounted Cash Flow (DCF) for Going-Concern Value

DCF is a common way to estimate Going-Concern Value because it directly links value to expected future free cash flow from ongoing operations.

A widely used enterprise value form is:

\[EV=\sum_{t=1}^{n}\frac{FCF_t}{(1+WACC)^t}+\frac{TV}{(1+WACC)^n}\]

Where \(FCF_t\) is free cash flow, \(WACC\) is the weighted average cost of capital, and \(TV\) is terminal value (the value beyond the explicit forecast period). In practice, most debates about Going-Concern Value are really debates about the credibility of forecasts, the discount rate, and terminal value assumptions.

Terminal value: where models can become fragile

Because companies are assumed to operate "indefinitely," terminal value often becomes a large portion of Going-Concern Value. Two common approaches are:

• Gordon growth:

\[TV=\frac{FCF_{n+1}}{WACC-g}\]

• Exit multiple (conceptual): applying a market multiple to a year-\(n\) metric (such as EBITDA) based on comparable firms.

If \(g\) is set too high, or if the chosen multiple ignores business risk and cyclicality, Going-Concern Value can be overstated even when the near-term forecast looks reasonable.

Method 2: Market multiples (trading comparables)

Multiples such as EV/EBITDA or EV/Sales can approximate Going-Concern Value by referencing how the market prices similar companies that are assumed to keep operating. The key is to normalize earnings (remove one-offs) and ensure comparability in margins, growth, leverage, and reinvestment needs.

Method 3: Asset-based approaches (assets "in use," not "for sale")

Asset-heavy businesses sometimes require an asset-based cross-check. Here the logic is "replacement and continued use," not distressed sale proceeds. This can help anchor Going-Concern Value when cash flows are temporarily depressed but operational capacity remains valuable.

Practical applications by role

• Investors: use Going-Concern Value to compare enterprise value with liquidation value, judge margin of safety, and test whether a temporary earnings dip is likely to recover or become structural distress.
• Lenders: use Going-Concern Value to evaluate collateral coverage and refinancing capacity, but will often compare it with liquidation value for downside protection.
• Auditors: assess whether financial statements can assume continued operations and whether disclosures are needed when "substantial doubt" exists.
• M&A advisors: rely on Going-Concern Value to frame deal pricing around future earnings and continuity of contracts, workforce, and customers.

Comparison, Advantages, and Common Misconceptions

Going-Concern Value vs. Liquidation Value vs. Fair Market Value

Going-Concern Value and liquidation value can diverge sharply. Service businesses or brand-led companies may have high Going-Concern Value but low liquidation value because relationships and know-how do not transfer well.

Advantages of using Going-Concern Value

• Closer to economic reality for operating firms: it focuses on sustainable cash generation rather than balance-sheet snapshots.
• Better for comparing companies: two firms with similar book value can have very different Going-Concern Value due to different margins, customer retention, or competitive position.
• Essential in M&A and restructuring: deals and reorganizations are often justified by preserving the earning engine, not by selling assets.

Limitations and disputes

Going-Concern Value is assumption-heavy. Forecasts can be biased, discount rates can be mis-specified, and terminal value can dominate the conclusion. In cyclical industries, a single "normalized year" can change Going-Concern Value materially, which is why lenders, investors, and management teams sometimes disagree sharply.

Common misconceptions (and what to do instead)

"Going-Concern Value is guaranteed because the company is still open"

A company can be operating today while still having a fragile going-concern premise due to refinancing risk or covenant pressure. Treat Going-Concern Value as conditional and scenario-based when survival is uncertain.

"Going-Concern Value equals book value"

Book value is an accounting measure. Going-Concern Value is an economic measure based on expected cash flows and risk. Either can be higher than the other depending on the business.

"Add brand value on top of a DCF to be more accurate"

If the DCF already reflects brand strength through higher margins or retention, adding a separate brand valuation may double-count. Reconcile carefully, or keep intangibles inside the cash-flow assumptions.

"Liquidation value is always conservative and therefore 'safer'"

Liquidation value can be misleading if assets are specialized, if wind-down costs are high, or if forced-sale discounts are severe. A realistic downside analysis often brackets both Going-Concern Value and liquidation value rather than picking one blindly.

Practical Guide

Step 1: Confirm the going-concern premise before modeling

Start by checking whether the "indefinite operation" assumption is reasonable. Review liquidity runway, near-term maturities, covenant headroom, and access to funding. If survival depends on uncertain financing, Going-Concern Value should be paired with a liquidation or distressed scenario.

Step 2: Build a "sustainable cash flow" view

Going-Concern Value should be anchored in cash flows the business can maintain:

• Remove one-time gains or losses that will not repeat
• Separate temporary shocks from structural decline
• Include realistic reinvestment (maintenance capex and working capital) needed to keep operations running

Step 3: Choose the method that matches the business

• Use DCF when cash flows are reasonably forecastable or when you can build credible scenarios.
• Use comparables when peers are truly similar and the market is not distorted.
• Use an asset-based cross-check when assets "in use" drive economics and replacement cost matters.

Step 4: Stress-test the assumptions that drive Going-Concern Value

Small changes in revenue growth, margin, \(WACC\), or terminal value can materially change Going-Concern Value. A practical stress test asks: "Under a plausible downside, does the firm breach covenants or run out of cash?" If yes, the going-concern assumption itself may fail.

Step 5: Compare outcomes rather than trusting a single point estimate

When distress risk is meaningful, use a simple bracket:

• Base case Going-Concern Value (operating continuity)
• Downside case (weaker demand, higher funding costs)
• Liquidation value (wind-down proceeds net of costs)

This avoids the common mistake of presenting one "precise" Going-Concern Value when the real decision is about survival probability.

Case study: Hertz's 2021 exit from Chapter 11 (illustrative use of the concept)

Hertz filed for Chapter 11 protection in 2020 and later exited bankruptcy in 2021. As travel demand improved and funding access changed, stakeholders increasingly focused on the operating business's earning power rather than a distressed asset-sale outcome. This is a setting where Going-Concern Value can materially exceed liquidation value: fleet value matters, but continuity (brand, demand recovery, and the ability to finance and manage the fleet) can drive a higher enterprise valuation than piecemeal liquidation assumptions. This case is included for illustration only and is not investment advice.

Resources for Learning and Improvement

Accounting and auditing standards (going concern assessment)

• IAS 1 guidance on going concern and material uncertainty (IFRS reporting context)
• ISA 570 on auditor responsibilities relating to going concern
• PCAOB AS 2415 for going concern considerations in U.S. issuer audits

These materials clarify what evidence and disclosures matter when the going-concern assumption is under pressure.

Valuation foundations

• Corporate finance and valuation curricula that explain enterprise value, free cash flow, discount rates, and terminal value discipline
• Practitioner references that connect Going-Concern Value to M&A pricing and restructuring outcomes (cash-flow sustainability, not just multiples)

Public filings as real-world examples

Annual reports and risk disclosures often contain the practical inputs behind Going-Concern Value debates: liquidity, maturities, covenants, and management plans. Reading these sections improves your ability to judge whether continuity assumptions are realistic.

Market-implied risk signals

Credit ratings research, bond yields, and (where available) credit default swap spreads can serve as reality checks on whether a company is priced like a stable going concern or like a potential distress candidate.

FAQs

What is Going-Concern Value in one sentence?

Going-Concern Value is the value of a business assuming it continues operating and generating profits, including the premium from its customers, people, processes, and brand.

Why is Going-Concern Value often higher than liquidation value?

Because liquidation typically destroys operating synergies: contracts may terminate, customers may leave, and employees may depart, reducing what the business can earn compared with staying open.

Is Going-Concern Value the same as enterprise value (EV)?

They are closely related in practice. EV is a capital-structure-neutral measure of the operating business. Going-Concern Value is the valuation premise that the business remains operating. Many EV estimates implicitly assume a going concern.

How do I know when the going-concern assumption is questionable?

Warning signs include recurring losses, negative operating cash flow, tight liquidity, looming debt maturities, covenant stress, inability to refinance, or an auditor's going-concern emphasis or disclosure.

What is the biggest modeling mistake when estimating Going-Concern Value?

Letting terminal value dominate without discipline, using overly optimistic perpetual growth, an inconsistent discount rate, or unrealistic margins that assume away competition and reinvestment.

How should I use Going-Concern Value in investing without making forecasts too "precise"?

Treat Going-Concern Value as a range informed by scenarios and stress tests, then compare it with liquidation value or other downside anchors when failure risk is not negligible.

Conclusion

Going-Concern Value is a practical way to value what investors actually buy in a functioning company: an ongoing profit-generating system, not a pile of sellable assets. It is most useful when it is grounded in sustainable cash flows, realistic reinvestment needs, and a defensible view of risk. Because the going-concern premise can break under liquidity or refinancing pressure, strong analysis compares Going-Concern Value with liquidation value, stress-tests continuity, and communicates uncertainty with scenarios rather than a single fragile number.