Going concern value
Capital MarketsWhat a business is worth if it keeps operating, valued on its future cash flows.
Going concern value treats the company as a living business and values it on what it will produce: a DCF, or a multiple of normalised earnings, usually at a compressed multiple reflecting the distress.
It is compared against liquidation value to answer the first question in any restructuring: is this business worth more alive than broken up? If it is, there is a surplus worth restructuring for, and that surplus is what the classes are negotiating over.
The valuation is contested precisely because it determines the fulcrum. Junior creditors argue for a high value because it brings them into the money; senior creditors, already covered, often prefer a lower one and a faster process.
A business whose liquidation value exceeds its going concern value is destroying value by continuing, and its assets are genuinely worth more in someone else's hands.
Worked example
A distressed business earns 60 of EBITDA. At a compressed 5.0x, going concern value is 300.
Liquidation gives receivables of 120 at 80%, inventory of 100 at 50% and fixed assets of 200 at 40%, so 226 gross, less 26 of wind down costs, leaving 200.
The 100 surplus is what makes restructuring worth negotiating. Against 250 of secured and 150 of unsecured claims, the unsecured recover 33% in a reorganisation and nothing in a liquidation.