As valuators, we always consider whether a business has more value continuing to operate or in its net assets, if they were to be sold.
A going concern approach means that value is maximized when the business is sold under the assumption it will continue to operate. Businesses can be valued using a cash flow-based methodology or an adjusted net book value methodology.
A liquidation approach means that value is maximized by liquidating the net business assets or that the company does not generate a sufficient return on the shareholders’ investment, and that the company will not continue operating.With Covid-19 upon us, we are considering the following factors in determining whether a business will continue as a going concern:
Even if a business does not have sufficient liquidity at the valuation date to “weather” the Covid-19 storm, it still may be a going concern. A purchaser may be able and willing to inject capital into the business to own the business after Covid-19 (which in turn, would have a negative impact on value).
The future value of the business after Covid-19 will be linked to what the business does during Covid-19. A business may need to operate with negative cash flow during Covid-19 to preserve its value after Covid-19. This can happen for many reasons, including the retention of key leases, key employees, and customer relationships and preserving the value of a brand, to name a few. The above factors must be considered in conjunction on an approach.
In resolving matrimonial matters, the parties may need to consider the practicality of operating the business over the next several years: