Month: May 2023

A question I am asked frequently is: Can this business be valued?

I have written multiple blogs recently on various scenarios including:

• Part 1: Valuation of a business that has been operating for years, but with incomplete or poor financial data.
• Part 2: Valuation of a start-up
• Part 3: Valuation of a nonprofitable business

Then I realized there is another category of business: businesses that are worth more closed than continuing to operate.

This does not necessarily mean the business is not profitable. The business is typically technically viable, generating income and in some instances, profitable. That is why they do not fall into the category of the businesses discussed in Part 3 of this blog series.

So what is going on that makes a business more valuable shut down?

Often the business has been operating for many years. The owner or owners are satisfied with the income derived from the business. In many cases the real estate associated with the business has appreciated significantly over the years. Additionally, for many businesses in this category, other assets, including heavy equipment, have been acquired over the years and the metal itself has value.

An overview of determining value of these businesses

In prior blogs in this series, I emphasized the importance of financial forecasts as an important starting point in the valuation process. In these circumstances, the forecast reveals the business is not viable. Applying the asset approach to valuation, I focus on the underlying assets of the business where real estate and equipment tend to be the business’ most valuable assets. Valuation is determined based on establishing the liquidity value of each asset, including real estate. The result of the detailed valuation analysis is that the business is worth more by closing and liquidating its assets than it is by continuing to operate.

Common triggers for valuing such a business

As one would expect, one trigger for needing a valuation of a business in this category is bankruptcy. The valuation is leveraged to determine payouts to debtors.

Another trigger for needing a valuation of a business that is worth more closed than continuing to operate is when the business is losing money and the situation is not fixable. Like the bankruptcy situation, the viable option is liquidating the business. The business valuation is the sum of the value of the underlying assets of the business.

The other trigger is settling an estate. Usually, the business has operated for many years and the owner or owners were satisfied with the income generated and their modest lifestyle. To settle the estate, the valuation of the business determines that more value would be generated by closing the business and liquidating the assets than continuing to operate.

Conclusion

As these four blogs have described, any business can be valued. The key is to secure a certified business appraiser, a professional who focuses on business valuation, with a proven track record and process so that the valuation is objective, thorough, and defensible should it need to stand up to scrutiny.

Whether selling or buying a business, allocating assets as part of a divorce, settling an estate or settling a shareholder dispute, when you need a business valuation, contact us.

When values matter.

Contact us.

A common question I am asked is: Can this business be valued?

In the first blog in this series, we focused on determining the value of a business that has been operating for years, but with incomplete or poor financial data. The second in the series focused on valuation of a start-up. And finally, this third blog is how to determine valuation of a nonprofitable business.

How do you determine the value of a business that is not profitable?

Forecasts are an important starting point in the valuation as written about in Part 2 of this series. A forecast is still relevant and an important factor in developing the valuation for a business that is not profitable. The reality is the value may be determined to be zero or negative should debts exceed valuation. In this situation, the seller may be interested in securing the tax benefits of a zero or negative valuation.

Typically, there are two scenarios when determining the valuation of a business that is not profitable. The value is tied to the people, or the business value is largely driven by an idea. Talented people and disruptive ideas are value drivers in a business and the use of public data can support the valuation of people and/or a disruptive idea.

In either situation, the valuation is developed by gathering and analyzing available information. The valuation prepared answers the question: how would a hypothetical buyer evaluate this business?

My thorough process leverages public data about businesses with talented teams and/or valuing an idea before it has been taken to market. Risk is then applied as it is especially important when calculating the value of a non-profitable business, similar to a startup. With expenses exceeding revenues, a higher level of risk will be applied.

Conclusion

Over the decades of developing business valuations that stand up to scrutiny, I have prepared detailed business valuations for firms having zero revenue as well as for business owners having an idea, but no product or service.

Determining the value of a non-profitable business can be done and is done with relative frequency. While not the most common situation I encounter, the steps to preparing a thorough and objective business valuation remain the same. Available public information, market information, and experience all support developing financial models that withstand the reasonable test and apply a risk factor to determine the valuation applying the discounted cash flow method.

If you are wondering if your business can be valued, you now know the answer is yes. Now it is important to secure a certified business appraiser with the knowledge, proven approach, and experience so that the valuation is thorough and defensible.

When values matter.

Contact us.