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Valuation Foundationsintermediate

Types of Value

The word value carries several meanings, and confusing them leads to errors. Going-concern value assumes the business keeps operating and is worth the present value of its future cash flows. Liquidation value assumes the business stops and its assets are sold off, often at a discount. Fair value is an exchange price between willing, informed parties, the basis used in much accounting. Intrinsic value is the analyst’s independent estimate of worth from fundamentals, which may differ from the market price. A valuation must state which type it is computing, because the same company can carry very different figures under each.

Why it matters

Ask what a company is worth and the honest answer is another question, worth for what purpose. A healthy firm is usually worth far more as a going concern, generating cash year after year, than as a pile of assets sold at fire-sale prices. A distressed firm may be worth more dead than alive, where liquidation value exceeds going-concern value. Fair value is the negotiated exchange figure, while intrinsic value is the analyst’s own estimate. Naming the type up front stops an apples-to-oranges comparison later.

Formulas

Going-concern value
Vgoing concern=∑t=1∞FCFt(1+r)tV_{\text{going concern}} = \sum_{t=1}^{\infty} \frac{FCF_t}{(1 + r)^t}
The present value of future free cash flows assuming continued operation. This usually exceeds liquidation value for a healthy firm.
Liquidation value
Vliquidation=Asset sale proceeds−Liabilities and wind-down costsV_{\text{liquidation}} = \text{Asset sale proceeds} - \text{Liabilities and wind-down costs}
What is left for owners after selling assets, often at a discount, and settling obligations. It can exceed going-concern value for a distressed firm.

Worked examples

Scenario

A profitable manufacturer generates steady free cash flow, while a loss-making rival owns valuable land but bleeds cash. How do the types of value differ across the two?

Solution

For the profitable manufacturer, going-concern value, the present value of its ongoing cash flows, comfortably exceeds the resale value of its assets, so going-concern value is the relevant figure. For the loss-making rival, the ongoing operation destroys value, so its liquidation value, driven by the valuable land, may exceed its going-concern value, and an owner might rationally wind it down. The same valuation toolkit yields opposite recommendations because the governing type of value differs between the two firms.

Common mistakes

  • ✗Every company is worth the same regardless of which value concept is used. Going-concern, liquidation, fair and intrinsic value can differ widely for the same firm, so the type must be stated.
  • ✗Liquidation value is always below going-concern value. For a distressed, cash-burning firm, liquidation value can exceed going-concern value, which is why some firms are wound down.
  • ✗Fair value and intrinsic value are identical. Fair value is a negotiated exchange price between informed parties, while intrinsic value is the analyst’s independent estimate, which may differ from any market figure.
  • ✗Book value is one of these market-based value types. Book value is a historical-cost accounting record, distinct from forward-looking going-concern or intrinsic value.

Revision bullets

  • •Going-concern value assumes the firm keeps operating
  • •Liquidation value assumes assets are sold off, often at a discount
  • •Fair value is an exchange price between willing, informed parties
  • •Intrinsic value is the analyst’s independent estimate from fundamentals
  • •A distressed firm can be worth more in liquidation than as a going concern
  • •Always state which type of value the analysis is computing

Quick check

Going-concern value differs from liquidation value mainly because it assumes

A distressed, cash-burning firm that owns valuable land may have

Connected topics

Intrinsic ValueFundamental AnalysisValuation ProcessFree Cash FlowEV vs Equity

Sources

  1. Titman & Martin
    Titman, S. & Martin, J. D. Valuation: The Art and Science of Corporate Investment Decisions. Pearson.
    Distinguishes the bases of value that a valuation can be computed on, including going-concern and liquidation perspectives.
  2. Graham & Dodd
    Graham, B. & Dodd, D. L. Security Analysis. McGraw-Hill.
    Classic treatment of going-concern versus liquidation value and the role of asset values as a floor.
How to cite this page
Dr. Phil's Quant Lab. (2026). Types of Value. Derivatives Atlas. https://phucnguyenvan.com/concept/sabv-types-of-value
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