The Challenge Of Valuing A Going Concern For A Losing Business

Unfortunately, we have this debate quite often. The bank wants to value a failing business at far more than the liquidated value of its assets. They claim there is a going concern value. This may be both reasonable and true, however, GAAP (Generally Accepted Accounting Practices) says differently, that the value of a losing business is the liquidated value of its assets. This is frequently a significant difference. Frankly, I understand and agree with the bank’s position, but any buyer must consider what the appraisal says and what his accountant says, and since he is the buyer with check in-hand, we must pay attention to his point of view as he also knows the rules–a losing business is only worth the liquidated value of its assets.

This ends up being a potential deal-breaker for both sides of the negotiation, banker and buyer.

Of course, the buyer can walk away. No loss, no deal. The banker can take the assets to auction at great cost and great risk that there will be no adequate bid with a long time delay and end up owning the assets. What’s the point? What was achieved?

Yet, we have this debate. What is likely to be the best answer is a compromise so the deal gets done. The buyer pays a little more than he should, but it is a going concern so there is inherent value, and the bank is willing to accept the deal now with some additional consideration. On the banker’s side it is a matter of principal. The buyer must allow this to happen as it makes sense, he is not overpaying, he is still getting a terrific deal. Everyone can still win.