6 minute read

Understanding Going Concern Value

Graphic of the term 'going concern' surrounded by business valuation icons.

Going concern value is a type of business valuation that determines how much a business is worth if it keeps running as it is today. It considers the value of assets, customer base, brand, and how well it makes money.

Compared to other valuation concepts, going concern assumes the business is continuing operations. By contrast, liquidation value is based on a distressed asset sale where the business shuts down and sells off assets piecemeal, often at lower prices. Book value only looks at the company’s balance sheet and may miss future earning potential.

Using this model to measure the value of a company is similar to the market approach. Buyers usually pay more for a business that is running well because they expect that ongoing operations continue to earn money.

Going Concern Value vs. Distressed Asset Sales

As noted, a going concern valuation looks at the business as a whole, not just its parts. It includes things like brand, customer loyalty, trained staff, and future profitability. Don’t confuse it with liquidation value; that’s what you get in a distressed asset sale where you shut down and sell everything.

For example, a coffee shop may be worth $300,000 based on going concern valuation in a normal asset sale, but only $80,000 in a distressed asset sale where you’re just selling equipment and supplies. Goodwill—like the shop’s strong reputation—adds value when it’s sold as an operating business in a standard asset sale; it doesn’t count if the shop is closed and the brand is gone.

The gap between these two asset sale scenarios can be wide, depending on the business’s condition and the market. A going concern approach is best when the business is sold as a whole and expected to continue operations. Liquidation value is more appropriate if a business is closing down, facing bankruptcy, or needs to sell quickly under pressure in a distressed asset sale.

Key Components That Determine Going Concern Value

Tangible assets: Buildings, equipment, and inventory add to fair market value. They support daily operations and can be sold, if needed.
Intangible assets: Brand reputation, loyal customers, and patents can raise value, even though they don't show up on a balance sheet.
Future cash flow potential: A business with steady or growing profits is easier to forecast. It'll usually have a higher going concern value.
Operational efficiency and scalability: Companies that run smoothly and can grow without huge new costs are more valuable to buyers.
Management team and workforce expertise: Skilled leaders and employees add value by keeping the business running well and knowing how to solve problems.
Market position, market conditions, and competitive advantages: A strong spot in the market, loyal customers, or unique products can help a business stand out and stay profitable. Earnings potential can raise its overall value.

Methods for Determining Going Concern Value

There are three main ways to estimate going concern value, each suited to different situations.

Income approach (Discounted Cash Flow method): Projects future earnings and discounts them to present value; best for profitable, growing businesses with an eye to the foreseeable future.
Market approach: Evaluates the business against comparable companies that have sold; works well when reliable market data is available.
Asset-based approach: Adds up asset values and subtracts debts; more common for companies whose financial statements show strong assets, but low earnings.

Each method fits different needs. Some experts combine two or more methods when determining the value of a business. Doing so helps balance the data and gives business owners a more complete picture.

Red Flags That Can Diminish Going Concern Value

Some factors can make future earnings less reliable. Buyers often look for these red flags during valuation.

Owner dependency issues: A business enterprise shouldn't be too reliant on the current owner's skills or relationships.
Customer concentration risk: When one or two customers make up most of the revenue, losing them can hurt the business quickly.
Outdated systems or technology: Old software, equipment, or processes can slow down operations. They can also cost more in the long run.
Inconsistent or declining financial performance: Unsteady or falling profits raise concerns about future earnings.
Legal or regulatory compliance issues: Ongoing lawsuits, unpaid taxes, or failure to meet industry rules can scare off buyers and lower value.

Strategies to Improve Going Concern Value Before Selling

Improving going concern value takes planning, but small changes can make a big difference.

Start by showing stable, predictable financial performance. Buyers want to see consistent profits.
Document key systems and processes so the business can run without the owner.
A strong management team also helps prove the company can succeed after a sale.
Diversify your customer base and supplier concentration to reduce risk. No single client or vendor should hold too much power.
Secure digital assets and intellectual property, like trademarks or patents, which can add value and protect your edge.
Recurring revenue—such as subscriptions or service contracts—can make earnings more predictable to buyers.

Finally, think like a buyer and address concerns before they ask. Clean up any liabilities or operational issues ahead of time. These steps can help build trust and raise the price buyers are willing to pay.

BizBuySell has many tools and resources to help you get started on valuing your business: