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Going-Concern Value

Definition

Going-concern value refers to the total worth of a company as an operational business. This value factors in not only the current physical assets and financial figures, but also the recurring income the company is expected to earn in the future. It is based on the assumption that the company will continue to operate indefinitely.

Phonetic

The phonetics of the keyword “Going-Concern Value” is: /ˈɡəʊɪŋ kənˈsɜːn ˈvæljuː/

Key Takeaways

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  1. Entity Value: Going-Concern Value refers to the total value of a company, assuming that it will stay in business and continue to operate indefinitely. It’s more than just the sum of its parts (assets), but also considers the company’s ability to generate profits in the future.
  2. Importance for Investors: This value is significant for investors and stakeholders as it helps estimate the potential growth and profitability of a company. A high Going-Concern Value signifies a lower risk investment and a promising return on investment.
  3. Affected by External Factors: Several external elements, like market conditions, economic trends, and industry competition can impact the Going-Concern Value of a company. It’s crucial to take these into account when assessing the overall financial health of the business.

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Importance

The Going-Concern Value is a crucial concept in business and finance because it estimates the value of the company assuming it will continue its operations into the foreseeable future. This value goes beyond the mere sum of its assets—it encompasses the earning potential and the intangible assets such as brand reputation, customer loyalty, and operational synergies that contribute to the future profitability of the firm. Hence, understanding the Going-Concern Value allows investors, creditors, and other stakeholders to assess the value of the company if its business operations continue unchanged, making it a vital metric for investment decision-making, financial health evaluation, and strategic planning.

Explanation

The Going-Concern Value is a concept utilized in business valuation to assess a company’s worth, assuming it continues its standard operations into the foreseeable future, rather than ceasing operations or being liquidated. This valuation strategy is predicated on the expectation that the company will continue to generate profits by going about its normal business activities. This concept is crucial to the financial health of a company because it helps identify the total value generated from ongoing operations, as well as the potential for future revenues and profits, which are paramount for investors, shareholders, and stakeholders.The Going-Concern Value is commonly used in a myriad of business decisions and processes. For instance, auditors rely on this principle to evaluate a company’s ability to continue trading for the foreseeable future. Furthermore, during a merger or acquisition, this value is used to assess the worth of a company beyond its asset base, accounting for elements like customer relationships, the strength of a brand name, or the knowledge and experience of a skilled workforce — elements typically referred to as ‘intangible assets’. Therefore, understanding the Going-Concern Value is essential for anyone involved in making strategic decisions or investments related to a business.

Examples

Going-concern value refers to a company’s value if it continues its operations into the future, rather than being liquidated. Here are three real world examples:1. Amazon.com: The going-concern value of Amazon is significantly higher than the value of its assets being liquidated piece by piece. This is due to its strong brand, global distribution network, vast customer base, recurring revenue, and scale that cannot be easily replicated by competitors.2. McDonald’s: McDonald’s is considered a ‘going concern’ because it boasts a strong brand recognition, successful business model, and many franchisees who operate under its name. Its value as an ongoing business is far greater than its liquidation value, which would just account for the sale of physical assets like properties, equipment, and inventory.3. IBM: IBM, a multinational technology company, has a higher going-concern value because of its well-established customer base, numerous patents, experienced workforce, and its long history of technological innovation. Just selling IBM’s physical assets like buildings and equipment wouldn’t generate nearly as much value as the income produced by its ongoing operations.

Frequently Asked Questions(FAQ)

What is Going-Concern Value?

Going-Concern Value is a valuation method for a business that assumes the company will continue operating into the foreseeable future. It includes both the company’s tangible and intangible assets.

What components comprise the Going-Concern Value?

The Going-Concern Value represents the total worth of a company. It comprises of both tangible assets (like machinery, buildings, and land) and intangible assets (such as brand equity, patents, copyrights, and business relationships).

How is the Going-Concern Value different from Liquidation Value?

While Going-Concern Value assumes the business will continue its operation, Liquidation Value determines the value of a company’s physical assets if it were to cease operations and sell its assets. Liquidation Value does not consider intangible assets, unlike Going-Concern Value.

How is Going-Concern Value calculated?

Financial analysts usually estimate Going-Concern Value by making forecasts about the company’s future cash flows, discount rates, and finally, discounting those cash flows back to the present value.

Why is Going-Concern Value important to investors?

Going-Concern Value is crucial to investors as it gives them a comprehensive measure of a company’s worth. It helps them to determine whether they will receive a high return on their investments.

What can impact a company’s Going-Concern Value?

Several factors can impact a company’s Going-Concern Value such as changes in the market, economic environment, competitive landscape, management efficiency, company’s financial health and etc.

Who uses the Going-Concern Value valuation method?

This method is most frequently used by business appraisers, financial analysts, accountants, potential investors, merger and acquisition professionals, and business brokers when evaluating a company’s total worth.

When is the Going-Concern concept questioned?

Auditors may express doubts about a company’s ability to continue as a going concern if the company has severe financial difficulties or if it’s facing potential bankruptcy.

Related Finance Terms

  • Financial Stability
  • Future Cash Flows
  • Asset Liquidation
  • Financial Solvency
  • Business Continuity

Sources for More Information

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