U.S. commercial bankruptcies surged in 2023, as businesses across many industries struggle with rising costs, a tight labor market, lackluster demand, economic uncertainty and geopolitical risks. When valuing a distressed business, its value as a going concern might not necessarily be appropriate. Some situations call for liquidation value. Here’s how these premises of value differ and how valuators estimate liquidation value. The key differences The International Valuation Glossary — Business Valuation defines going-concern value as “a premise of value that assumes the business is an ongoing commercial enterprise with a reasonable expectation of future earning power.” Most business valuations focus on a business’s going-concern value. However, for businesses contemplating bankruptcy, liquidation value is another important benchmark. The glossary identifies two types of liquidation value: 1. In an orderly liquidation,...

When valuing a business, it’s important to clearly identify the appropriate premise of value. There are two basic options: going concern value or liquidation value. In general, liquidation value sets the floor for a company’s value. When a company is “worth more dead than alive” — such as in a Chapter 7 bankruptcy filing — liquidation value is typically the appropriate premise of value. But it also may be relevant in other situations, as a recent Michigan Court of Appeals case demonstrates. Going concern vs. liquidation value Most valuations focus on a business’s going-concern value. That is, what’s the value of a business enterprise that’s expected to continue to operate into the future? But in certain situations, liquidation value can be an important benchmark. There are two types...