Dear Banker, What Is The Real Value Of An Upside Down Going Concern?

Dear Banker,

In a workout, we frequently debate the value of an asset sale of a defaulting, upside down, going concern business. It is a controversial issue, one that is worthy of a closer evaluation of both sides of the debate. The banker, of course, wants to get the highest value. The defaulting borrower wants the same thing, but the buyer is in control as it is his checkbook we are dealing with.

As we all know, Generally Accepted Accounting Principles (GAAP) says very specifically that the value of an insolvent, defaulting, nonprofitable business is the liquidated value of its assets. This is indisputable; this is the standard. Bankers maintain there is added value as the business is still a going concern, that it is a turnkey operation and thus there is added value and there must be additional consideration for this.

Buyers, when addressing the purchase, say that they are taking great risk as the business is a proven failure, no goodwill. Even when examining the Earnings Before Interest, Depreciation And Amortization (EBIDA), it does not cash flow. Thus, there is really no added value as a going concern. Besides, they and their accountants are all savvy enough to understand that there is little value beyond the profitability of the enterprise and if there is none, it is a huge gamble and only worth the liquidated value of the assets.

Business appraisers support the same theory and therefore when a losing business is appraised, it is always appraised at the liquidated value of the assets and deemed bankable for raising capital only at that level. Even their banks hold this standard when lending for the purchase.

Second Wind Consultants draws a hybrid conclusion, acknowledging the above well-argued issues and further acknowledging that the inherent value of everything being in place and ready to go adds clear value to the asset mix. Where there is finished electrical work and lighting, plumbing, lease holder improvements including walls, floors and ceiling, and there is trained personnel, money spent on advertising, etc., even a losing business still has added value to the buyer who is willing to try it again. Clearly, this added value is only worthwhile to the buyer willing to give the same business another try. If this is the case, I do believe there needs to be some additional consideration to the asset purchase to accommodate this elusive, yet real, added value.

How much? That’s hard to generalize. It depends on many factors, but certainly this particular factor needs to be evaluated and considered in the asset purchase and the bank should expect this to be included in the deal. While there is no multiplier of gross revenue or net income, there must be some consideration for the value of a going concern even if it is losing money. Not much, I would argue, but some acknowledgement of the concept. Fair is fair.