Page 22 - Bankruptcy and Reorganization Services

Chapter 5

Premise of Value: Going Concern Versus Liquidation

Once the appropriate standard of value is determined, practitioners must next determine the applicable
premise of value. Premise of value relates to the concept of valuing a subject in the manner in which it
would generate the greatest return to the owner of the property, taking into account what is physically
possible, financially feasible, and legal.

The premises of value include the following:

1. Going concern

2. Assembled group of assets

3. Orderly liquidation

4. Forced liquidation

A going concern is defined as an ongoing operating business enterprise. An extension of this definition
is going concern value. This is defined as the value of a business enterprise that is expected to continue
to operate into the future, and this is the premise of value used for most business valuations outside the
bankruptcy arena. However, a going concern premise of value is regularly employed in various contexts
of a bankruptcy proceeding. For example, the determination of a going concern value is used to assess
the reorganization value of an entity that will emerge from Chapter 11. In addition, a going concern
premise of value may be used in the assessment of cash collateral, adequate protection, and claims de-
termination, as well as the evaluation of the solvency of a debtor in the context of avoidance actions.

Because a going concern premise of value contemplates an ongoing business, generally, a going concern
premise allows practitioners the widest latitude in terms of which valuation approaches and methods to
consider (see chapter 9, "Valuation Approaches and Methods," in this practice aid). Therefore, it is im-
portant for the practitioner to have a thorough understanding of the various valuation approaches as well
as a knowledge of factors or conditions that may determine the valuation approaches that offer the most
meaningful indication of value.

When a business is no longer a going concern (and therefore has little to no going concern value), or
when the premise of value is dictated by statute or case law, practitioners should apply a liquidation
premise of value to the enterprise in question. fn 1 Assembled group of assets (or assemblage of assets),
orderly liquidation, and forced liquidation all represent liquidation premises of value. However, as the
names imply, assumptions surrounding the marketing period and the manner in which assets are dis-
posed are different for each of the three liquidation premises.

fn 1 The best interest of creditors test referenced in chapter 6, “Need for Valuations in the Context of Financial Distress and Bank-
ruptcy,” of this practice aid is an example of a valuation assignment that would dictate the use of a liquidation premise of value.

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