During its lifetime, a business can have a range of values. For example, a business might be valued as a going concern or a forced liquidation. The worth of a going concern is equal to the value of the collection of the company’s income-producing assets or the net present value of the cash the company will generate over time. In turn, a company in liquidation is valued as the sum of the cash values of the individual assets that the company will sell on a piecemeal basis.
In most cases, the stakeholders of a business -- those with an interest in the business -- will continue to operate a business if the returns the company generates exceed the proceeds of an alternative investment, which would be made possible by the liquidation of the company’s assets and the investment of the cash in other assets. The income-producing assets of a going concern may be valued on a controlling interest or minority-interest basis, and by using either the fair-market-value or income method.
If an interest in a going concern is valued on a controlling-interest basis, the valuation is determined by the best use of the company’s assets. In this case, the assets that do not directly support operations may be valued on a liquidation basis. If the business interest is valued on a minority-interest basis, the company may be valuated on a going-concern basis. In turn, a going concern may be valued at its fair-market value, which is the price a reasonable and willing buyer will pay in an arm’s length transaction in an open market. A going concern might also be valued with the income approach that values a company according to the economic benefits company assets are expected to generate as stated as the net present value of forecasted cash flows.
An insolvent business is either unable to pay its bills when they become due or has liabilities that exceed the company’s assets. An insolvent business may liquidate, or sell its assets on an asset-by-asset basis. The value of an asset of a liquidated company equals the sale proceeds -- the asset’s market value -- minus sales expenses. The valuation of an insolvent business is important to creditors and other stakeholders who must share the proceeds from the sale of the liquidated company’s assets.
A company’s liquidation valuation is equal to the cash, less sales expenses, a company receives in exchange for its assets, each of which is priced and sold on an individual basis. For example, if a conveyor system is sold, its value might be equal to the proceeds from the sale less the auction, tax and shipping expenses. Other liquidation expenses include sales fees, taxes and administrative expenses.
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