Going Concern vs. Liquidation Value

The going concern assumption is the assumption that a company will continue being in operation in the immediate future. The value of a company under the going concern assumption is known as the going concern value.

On the other hand, liquidation value is the value of a company if it were to cease operations and its assets sold off individually. This is appropriate for companies under financial distress. Most of the time, the going concern value will be higher than the liquidation value as it will incorporate value-added from managerial skills and assets synergy. However, the going concern value may be lower for companies that consistently incur losses.

A company’s liquidation value may drastically change over time, depending on the time available to sell the company’s assets. For a company with perishable goods, the value of perishable goods will significantly reduce over time and therefore need to be sold off quickly compared to nonperishable goods that can be sold off in an orderly manner. This gives the nonperishable goods an orderly liquidation value.

Question

The value measure with the least value is most likely the:

1. Investment value.
2. Liquidation value.
3. Going concern value.

Solution

The correct answer is B.

Liquidation value has the least value. It is the value of a company if it ceased operations and its assets sold off. It is appropriate for companies under financial distress.

A is incorrect. Investment value is the value to an investor because of the potential synergies the investor can get from the asset. Due to these potential synergies, investment value will be higher.

C is incorrect. Going concern value is the value of a company under the going concern assumption, which assumes that a company will continue to operate in the foreseeable future.

Reading 22: Equity Valuation: Applications and Processes

LOS 22 (b) Explain the going concern assumption and contrast a going concern value to a liquidation value.