Going concern premium
Capital MarketsThe excess of going concern value over the value realised if the business stops, which is the surplus a restructuring exists to preserve and divide.
Also written: going concern surplus, reorganisation premium
A restructuring is worth doing only where the business is worth more alive than dead. The difference between the two numbers is the going concern premium, and it is the pool every class is really negotiating over, since the alternative outcome is what each of them falls back to.
It exists because a functioning business is more than its assets. Customer relationships, an assembled workforce, contracts, licences and a supply chain have value in combination and very little separately, which is why an asset heavy manufacturer can have a small premium and an asset light services business a very large one.
It also decays. Every month of uncertainty costs customers, staff and supplier credit, so the premium is largest at the start of a restructuring and smaller at the end. That is the real reason speed has value, and it is why fully covered senior lenders push for a quick process while junior classes, whose recovery depends on the valuation, are content to litigate.
Be careful which alternative you measure against. A break up liquidation is one comparator, but the realistic alternative is often an accelerated sale of the business as a going concern, which realises considerably more and therefore leaves a smaller premium to divide.
Worked example
A business earning 60 of EBITDA is worth 300 as a going concern, illustratively.
A liquidation realises 226 of gross proceeds less 26 of wind down costs, so 200 net.
The 100 difference is the going concern premium. It is what makes a restructuring worth negotiating, and it shrinks with every month the negotiation runs.