What Is Going Concern Value Basis?

If you’ve ever wondered why businesses are sometimes valued higher than just the sum of their assets, you’re thinking about the going concern value basis. This term means looking at a business as more than just its buildings, equipment, or inventory. It’s about the value that comes from the business being able to keep operating into the future. In this post, you’ll learn what going concern value basis means, why it’s important, and how it can impact decisions about selling, buying, or valuing a business or property.

Breaking Down the Basics: Asset Value vs. Going Concern Value

Most people are familiar with asset value. That’s what you get when you add up what a business owns: buildings, land, equipment, and inventory. But the going concern value is different. It includes not only those physical things but also the value that comes from a business being up and running. Think about it, if you buy a bakery, you’re not just buying ovens and flour. You’re also buying the recipes, loyal customers, trained staff, and the ability to open the doors tomorrow and keep making money.

The going concern value basis takes all these extra pieces into account. It’s the difference between buying a car part by part and buying a car that’s ready to drive off the lot. This approach is especially important for businesses that rely on their reputation, customer relationships, and skilled employees.

When Does Going Concern Value Matter?

You might ask, “Why should I care about this?” The going concern value basis matters in a few key situations:

  1. When a business is being bought or sold, the price is often based on going concern value, not just the strict asset value.
  2. If a company faces bankruptcy or is closing, the value can drop to just the asset value, since the business is no longer a going concern.
  3. For property tax purposes, some states and local governments consider going concern value when figuring out how much a business is worth.

Imagine a hotel that’s busy and profitable. If you value it just by the land and building, you miss the value of bookings, staff, and systems that make it work. But if the hotel closes and is sold as an empty building, all those extras disappear. That’s the big difference the going concern value basis can make.

How Is Going Concern Value Calculated?

Calculating going concern value basis isn’t just a matter of adding numbers. Experts look at several parts of the business:

  1. Physical assets (like buildings and equipment)
  2. Intangible assets (such as reputation, brand, client lists, and specialized know-how)
  3. The business’s ability to keep generating profits

A common method is to start with the asset value, then add the value of intangible factors. For example, if a restaurant’s equipment and furniture are worth $100,000, but its name, loyal customers, and trained staff add another $200,000 in value, the going concern value might be $300,000.

Appraisers often use income-based approaches, looking at expected future earnings. This helps paint a realistic picture of what the business can deliver over time, not just what it owns today.

The Basis Impact: What Does It Mean for You?

The term “basis” usually refers to the starting value for tax or accounting purposes. When you buy a business on a going concern value basis, your basis is set by the total purchase price, including both physical and intangible assets. This matters when you later sell the business, calculate depreciation, or figure out taxes.

For example, if you buy a business for $500,000, and $350,000 of that is for tangible assets while $150,000 is for goodwill and reputation, your basis reflects the full amount. This determines your tax deductions (like depreciation) and your capital gains if you sell later on.

Getting this right is important for owners, buyers, and accountants. If you ignore the going concern value, you might underestimate what the business is worth or pay more taxes than necessary. If you’re dealing with property taken for public use (like eminent domain cases), understanding your basis can help you get fair compensation.

Real-World Examples: Why Going Concern Value Basis Matters

Let’s look at a couple of simple examples:

  1. A local coffee shop is bought by a new owner. The building and equipment are worth $200,000, but the shop has a loyal customer base and a popular brand. The total purchase price is $350,000. The extra $150,000 is the going concern value. This amount affects the new owner’s tax records and future decisions.
  2. A family-owned motel is forced to close due to a new highway project. The owner argues the property should be valued as a going concern, not just as vacant land. If successful, they may get more compensation because the business could have kept operating and generating income.

In both cases, the going concern value basis leads to a higher valuation and can make a real difference in negotiations, taxes, and legal outcomes.

Key Considerations and Common Questions

It’s easy to confuse going concern value with market value or asset value, but they’re not the same. Market value is what someone is willing to pay, which may or may not include the value of the business as a working operation. Asset value just looks at the things you can see and touch. Going concern value basis adds the less obvious, but very real, value of a business being open and successful.

If you’re buying, selling, or inheriting a business, or if your property is involved in a government project, knowing how going concern value impacts your basis is key. It helps you get the right price, pay the right taxes, and make smart decisions about the future.

Conclusion

Understanding the basis impact of going concern value helps you see the true worth of a business or property. It’s not just about what you own, but also what makes your business tick and keeps it going. Contact us to learn more.