What is the difference between going concern value and liquidation value, and when does each matter?

Going concern value and liquidation value represent two fundamentally different assumptions about a company's future.

Going Concern Value:

Assumes the company continues operating indefinitely. Value comes from future cash flows generated by the business as a whole.

V(going concern) = Sum of PV(future FCFs) + PV(terminal value)

Liquidation Value:

Assumes the company ceases operations and sells all assets individually. Value is the net proceeds from asset sales after paying all liabilities.

V(liquidation) = Sum of (Asset realizable values) - Total liabilities - Liquidation costs

Example — Ridgeway Manufacturing:

Ridgeway's going concern value ($500M) far exceeds liquidation value ($65M), so the company should continue operating.

When to Use Liquidation Value:

1. Distressed companies: When the firm cannot generate sufficient cash flows to service debt
2. Floor valuation: Liquidation value sets a minimum — if going concern value falls below liquidation value, rational owners should liquidate
3. Asset-heavy companies: Real estate holding companies or natural resource firms where assets can be sold at predictable prices
4. Hostile takeover defense: Target boards may argue the bid understates liquidation value

Types of Liquidation:

• Orderly liquidation: Assets sold over a reasonable period (3-12 months), typically realizes 70-90% of fair market value
• Forced liquidation: Distress sale under time pressure, typically realizes 40-60% of fair market value

CFA Exam Tip: If a vignette gives you a company with going concern value below liquidation value, the logical recommendation is liquidation or asset sale, not continued operations.

Check our CFA equity valuation question bank for practice scenarios.