Going Concern Valuation: Definition, How It Works, and Examples

By Joey N. Friedman, CPA, ABV, MAcc, MIB — President, Joey Friedman CPA PA. This article is published by Joey Friedman CPA PA, a Florida professional association. All forensic accounting, business valuation, expert witness, and litigation support services described herein are provided by Joey Friedman CPA PA. Mr. Friedman’s professional credentials and experience are exercised in his capacity as an officer, agent, and licensed CPA practicing under and on behalf of Joey Friedman CPA PA.

Quick Answer

Going concern valuation premise of value in forensic CPA business valuation
Going Concern Valuation: Definition, How It Works, and Examples 1

Going concern valuation values a business under the premise that it will continue operating indefinitely. The valuation analyst applies income, market, or asset methods on the assumption that the business is a productive, ongoing entity — not in wind-down or liquidation. Going concern is the default premise of value for healthy operating businesses. AICPA Statement on Standards for Valuation Services (SSVS) No. 1 requires the analyst to state the premise of value applied and the basis for that premise. The opposite premise — liquidation — applies only when the business is failing, has been ordered to dissolve, or where the standard of value (rare) explicitly requires it. In practice, virtually all closely-held business valuations for divorce, shareholder oppression, partnership dissolution, estate and gift tax, and commercial litigation apply going concern as the premise of value.

Understanding the going concern premise — and when it applies vs. when liquidation is the appropriate premise — is foundational to reading and interpreting a business valuation report. This article explains the premise, when it applies, when it doesn’t, and how the choice affects the value conclusion.

What “Going Concern” Means

“Going concern” is an accounting and valuation concept that assumes the business will continue operating for the foreseeable future. The business is:

  • Generating revenue
  • Paying its obligations as they come due
  • Capable of maintaining operations
  • Not in receivership, bankruptcy, or wind-down
  • Not contemplating imminent closure

Under the going concern premise, the business’s assets are valued in the context of how they support continued operations — not in the context of being sold off individually. Customer relationships, brand recognition, operational know-how, and workforce continuity (often called goodwill) all have value because they continue producing income.

Going Concern vs. Liquidation

The premise of value frames every part of the valuation. The two primary premises produce very different conclusions:

Premise What’s valued Methods that apply Typical conclusion
Going concern Ongoing business including operating goodwill Income (DCF, capitalization), market (guideline public co, guideline transaction), net asset value as floor Higher — includes value above tangible assets
Liquidation Sum of assets sold off, less liquidation costs and liabilities Liquidation value (orderly or forced) Lower — no operating goodwill

For an operating business with $1M of annual normalized EBITDA: going concern valuation at 5x EBITDA = $5M enterprise value. Liquidation valuation of the same business might be $500K-$1.5M depending on asset composition. The choice of premise is rarely a small difference.

When Going Concern Applies (Default)

Going concern is the default premise for any operating business that meets the going-concern criteria. Specifically:

The business is currently operating. Revenue is flowing, customers are being served, vendors are being paid, employees are being compensated.

There’s no immediate intent to discontinue. Management isn’t planning a wind-down. No board resolution dissolving the company.

Operations are sustainable. The business generates enough revenue (or has access to enough financing) to continue. Not on the brink of insolvency.

External conditions don’t threaten survival. No regulatory order, no loss of critical license, no catastrophic loss of customer concentration.

For virtually every Florida divorce involving a closely-held business, shareholder oppression matter, partnership dissolution, estate and gift tax valuation, or commercial litigation involving an operating business — going concern is the appropriate premise of value.

When Liquidation Applies Instead

Liquidation premise applies in narrower circumstances:

The business is failing. Operating losses, declining revenue, customer attrition, vendor distrust. The business as a going concern is worth less than the assets in liquidation — meaning a rational owner would close it down and sell off the assets.

The business is in bankruptcy. Court-ordered wind-down or reorganization that involves asset sales.

The business has been ordered to dissolve. Court order in a partnership dispute, or other legal mandate.

The fact pattern requires it. Some specific contexts (rare) call for liquidation premise as a matter of law or contract.

The analyst’s choice of liquidation premise must be supported by the facts. Choosing liquidation when going concern applies — or vice versa — is one of the more consequential errors in business valuation.

The Going Concern Test

Auditors and valuation analysts apply what’s commonly called the “going concern test” — an assessment of whether substantial doubt exists about the entity’s ability to continue as a going concern. Indicators of substantial doubt include:

  • Recurring operating losses
  • Working capital deficiencies
  • Loan covenant defaults
  • Loss of key customers, suppliers, or licenses
  • Pending litigation that threatens the business
  • Inability to raise capital

If multiple indicators exist, the analyst evaluates whether the business has a credible plan to address them. Without such a plan, the going-concern premise may not apply — and liquidation premise (or a combination) may be more appropriate.

Going Concern in Florida Divorce

In Florida divorce, the closely-held business is typically valued as a going concern even when the business has experienced volatility. The analyst documents:

  • Revenue trend (multi-year, normalized for one-time events)
  • Earnings trend (multi-year, normalized for owner-controlled distortions)
  • Customer concentration and stability
  • Industry conditions
  • Management capacity (does the business depend on the divorcing spouse personally?)

If the business genuinely cannot continue without the divorcing owner — and the owner intends to discontinue — the premise of value gets more complicated. The forensic CPA may need to value the business under a transition scenario (e.g., sale to a third party who would assume operations) or a wind-down scenario.

Going Concern in Estate and Gift Tax

Estate and gift tax valuations almost always apply going concern as the premise. The IRS’s expectation is that business interests transferred (by gift or at death) continue operating in the hands of the recipient. The going-concern value, with appropriate marketability and control discounts where applicable, is the basis for federal tax reporting.

If the estate plan contemplates immediate liquidation upon transfer, the premise of value may shift — but this is uncommon. Most estate-tax valuations apply going concern.

Going Concern in Shareholder Oppression

Florida statutory fair value (the standard applied in shareholder oppression cases) typically values the business as a going concern. The minority shareholder being bought out is being compensated for what they would have received from continued operations. Liquidation premise would defeat the statute’s purpose.

What Going Concern Changes in Methodology

Under the going-concern premise:

The income approach is dominant. Future cash flows from continued operations drive the valuation conclusion. DCF and capitalization of earnings are core methods. Cash flow projections assume continuity.

Market multiples apply directly. Industry multiples (EV/EBITDA, EV/Revenue) reflect what going-concern businesses trade for. No discount for “needs to be liquidated.”

Goodwill is captured. The intangible value above tangible assets (customer relationships, brand, know-how) appears in the conclusion. This goodwill is often the bulk of business value for service-heavy businesses.

Net asset value serves as a floor. The going-concern value should never fall below the net asset value — if it does, the owner would rationally liquidate. NAV is computed as a check, not as the primary value.

Tax position carries forward. Tax attributes (NOLs, depreciation carryovers) embedded in the business have ongoing value to a continuing owner.

What Liquidation Premise Changes

Under the liquidation premise, the methodology shifts:

Asset approach dominates. The analyst values each asset separately (cash, receivables, inventory, real estate, equipment) and sums.

No goodwill. Intangible value above tangible assets disappears.

Liquidation costs apply. Legal, broker, severance, and asset-marketing costs reduce the net proceeds.

Discounts for forced sale. Orderly liquidation produces higher proceeds than forced; both reduce from fair market value.

Tax attributes typically lose value. NOLs and other tax attributes may be lost in a liquidation, depending on structure.

How the Premise Affects Buy-Sell Agreements

Buy-sell agreements often specify which premise applies. Joey N. Friedman has reviewed buy-sell agreements where the wording was ambiguous on premise — leading to disputes at the actual triggering event. Best practice:

  • State explicitly that valuations under the buy-sell agreement apply going-concern premise (or another, as facts require)
  • Specify the standard of value (fair market value vs fair value)
  • Specify whether marketability and control discounts apply

For deeper coverage of buy-sell triggering events, see the firm’s coverage of buy-sell agreement triggering events.

A Numerical Example

Consider a closely-held service business with:

  • Annual normalized EBITDA: $1,000,000
  • Real estate (owned office building): $2,000,000 FMV
  • Equipment, inventory: $500,000 FMV
  • Receivables: $300,000 (assume fully collectible)
  • Cash: $200,000
  • Total liabilities: $400,000
  • Net working capital adequate

Going concern valuation (using market approach EV/EBITDA at 5x):

  • Enterprise value = $1M × 5 = $5,000,000
  • Add cash = $200,000
  • Subtract debt-equivalent liabilities (interest-bearing): assume $300,000
  • Equity value before discounts = $4,900,000
  • Apply 20% DLOM (closely-held): $4,900,000 × 0.80 = $3,920,000

Liquidation valuation:

  • Real estate: $2,000,000 × 90% (orderly) = $1,800,000
  • Equipment + inventory: $500,000 × 70% = $350,000
  • Receivables: $300,000 × 90% = $270,000
  • Cash: $200,000
  • Subtotal: $2,620,000
  • Less liquidation costs (legal, broker, severance): $250,000
  • Less liabilities: $400,000
  • Net liquidation proceeds: $1,970,000

The going concern conclusion ($3,920,000) is roughly double the liquidation conclusion ($1,970,000). The difference is the operating goodwill — the intangible value of the continued business. Choosing the right premise matters.

What Documentation Supports the Premise Choice

A defensible valuation report documents the basis for the premise of value:

  • Statement of premise applied (going concern, with rationale)
  • Indicators considered (revenue trend, profitability, customer stability, industry conditions)
  • Any going-concern test indicators present, and how they were assessed
  • Where premise affects methodology (which methods were applied, how)
  • Cross-check between going-concern conclusion and net asset value (or liquidation value)

For Daubert-ready testimony, this documentation is essential.

Frequently Asked Questions

What is the going concern premise of value?

Going concern premise assumes the business will continue operating indefinitely. The valuation reflects the value of the business as an ongoing entity producing income, with intangibles like goodwill included.

How is going concern valuation different from liquidation value?

Going concern values the business as an operating entity; liquidation values it as the sum of assets to be sold off. Going concern includes operating goodwill (customer relationships, brand, know-how); liquidation does not. Going-concern conclusions are typically higher than liquidation conclusions for operating businesses.

When does the going concern premise apply?

Going concern applies as the default premise for any business that is currently operating, has no immediate intent to discontinue, has sustainable operations, and faces no external threats to survival. This covers virtually all operating businesses being valued for divorce, shareholder oppression, partnership dissolution, estate tax, and commercial litigation.

Who decides the premise of value?

The valuation analyst — typically an ABV-credentialed CPA, CVA, or ASA — applies professional judgment based on facts. The choice is documented in the valuation report. In litigation, opposing experts may apply different premises, and the trier of fact may need to resolve the disagreement.

Can a business be valued under both premises?

Yes. Sometimes the valuation report includes both going concern and liquidation premises — using NAV/liquidation as a floor check on the going concern conclusion. The final conclusion typically reflects one premise as primary, with the other shown as supplementary analysis.

What’s the going concern test?

The going concern test evaluates whether substantial doubt exists about the entity’s ability to continue as a going concern. Indicators of substantial doubt include recurring operating losses, working capital deficiencies, loan covenant defaults, loss of key customers/suppliers/licenses, pending litigation threatening the business, or inability to raise capital. When multiple indicators exist, the analyst evaluates whether a credible plan addresses them.

What’s the standard accounting standard for going concern?

For US accounting, ASU 2014-15 (FASB) requires management to evaluate going concern at each reporting period. For audits, AS 2415 (PCAOB) governs the auditor’s evaluation. For valuation, AICPA SSVS No. 1 requires the analyst to state the premise of value and the basis for that premise.

How does the premise affect estate tax valuations?

Estate tax valuations almost always apply going-concern premise — the IRS assumes business interests continue operating in the hands of the recipient. Liquidation premise applies only in narrow situations where the estate plan or facts compel it.

Working with a Forensic CPA on Premise of Value

The premise of value is foundational to any business valuation. Getting it wrong — applying liquidation when going concern is appropriate, or vice versa — typically produces a value conclusion that’s off by 50% or more. For any formal valuation (divorce, tax, transaction, litigation), a credentialed business valuation professional applies the appropriate premise and documents the choice.

Joey Friedman CPA PA, through its President Joey N. Friedman, CPA, ABV, MAcc, MIB, provides ABV-credentialed business valuation services throughout Florida. The firm’s valuation practice applies going-concern premise (with NAV floor checks where appropriate) across divorce, shareholder oppression, partnership dissolution, estate and gift tax, and commercial litigation matters. Contact the firm to discuss your specific situation.

About Joey Friedman CPA PA

Joey Friedman CPA PA is a Florida professional association providing forensic accounting, business valuation, expert witness, and litigation support services. The firm is led by Joey N. Friedman, CPA, ABV, MAcc, MIB, who serves as the firm’s President.

All services described in this article are provided by Joey Friedman CPA PA. Engagement letters and professional services are issued by the firm. Joey N. Friedman signs in his capacity as the firm’s President — as an officer and agent acting on behalf of Joey Friedman CPA PA, not in any personal or individual capacity. Mr. Friedman’s professional credentials — including CPA license, ABV (Accredited in Business Valuation, AICPA), and ACFE membership — are exercised under the firm.

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