Going Concern Value Is A Mystical Concept When The Business Is Not Profitable
Why would a bank demand more than the appraised value of the assets in a workout liquidation situation? It’s easy to say the bank is being greedy, obnoxious, over-reaching, unfair, etc., and while this may also be true, frequently there is some merit to their demand.
It is not necessarily just to get more…
But you say, as I have many times, “it is what it is.” The asset value as appraised by an appraiser should be what it is worth and thus the bank should be held to collect that amount or, if it believes the appraisal is unreasonably low, then the remedy is foreclosure and liquidation by auction by the bank, not demanding more than the assets are worth.
Unfortunately, it is not always that easy or clear. First of all, market value is not the benchmark as the property can only be liquidated by foreclosure thus the issue is liquidated value, not fair market value. Sometimes the bank will be working off fair market value when in reality they should be using liquidation value as the benchmark. However, that is not the issue I am getting to.
The real issue I am occasionally forced to reckon with is the “going concern” issue. This is the 800 lb. gorilla in the room. The banks argue that there is inherent value in a going concern. Even though the lease hold improvements belong to the landlord when in default, the bank argues that the business is continuous, the lease hold improvements are being used by the business, the employees are in place, the cash flow continues, the sales are continuous, and thus, the inherent value of the going concern is greater than the value of the assets as appraised.
Are they correct?
It’s a tough call. I would argue that, as per standard accounting procedures, a business that is losing money is only worth the value of the assets. But in this situation, the bank argues it’s worth more as a going concern. Are they correct? I do not believe they are but if the bank believes it, it will likely cost a few thousand more than the assets are worth. There is nothing left to discuss with the bank if they are stuck on this point other than to either go along with their demand or call their bluff, leave your offer on the table, and walk away.
So yes, clients have been forced to pay more than the value of the assets in a liquidation situation because of the going concern argument. When this occurs, argue your best and accept the results. The bigger, more important battle ground is the personal guaranty – that’s where the workout is won or lost. A few thousand more or less on the asset sale is never a deal breaker.
