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How to value an unprofitable business

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How much is a business with no revenue worth?

Valuing a business that makes no money follows the same route as valuing a profitable business, although while the primary focus would typically lie on the value of company assets and debts, the valuation of an unprofitable business will extend to its liquidation value if the business is on track to run out of cash.

Potential buyers will also heavily rely on due diligence to assess the risk of insolvency, any pending threats of liquidation and the prospects of recovery.

If a business was historically profitable but is now breaking even under the current trading climate, your accounting records, including historical earnings will illustrate whether declining performance and unprofitability are the end product of a temporary or permanent phase.

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Why value an unprofitable business?

You may choose to value an unprofitable business to compare it to a previous valuation and assess how much value has been lost, to establish profit benchmarks or to prepare the business for sale. It’s important to note that although the profit streams of the business may be stagnant, company assets will usually bear value, in addition to goodwill.

Goodwill is an intangible asset, such as brand reputation or name, that adds business value. Goodwill is the amount by which the sale price exceeds the fair market value of a business as detailed in the business valuation report.

To value a business with negative earnings, your business valuer may consider a series of valuation methods that include:

Discounted cashflow – This method takes a view of current and forecasted cash flow to determine how much the business is worth and is likely to be worth down the line.  

Sales comparison – The value of a business will be determined by comparing it to similar or exact businesses that have been sold.

Asset valuation – The value of company assets will be calculated, taking into consideration future value. The valuation report is useful for unprofitable businesses with little to show in the way of cash reserves, but enough valuable assets to attract potential buyers.

The prospects of the business will also contribute to its worth as if the business has the potential to make money once economic conditions improve or a cash injection is secured, it could be on track to exit the red and generate a profit without the risk of creditor pressure.

How can a drop in profit affect the value of a business?

Factors outside of your control, such as the Covid-19 pandemic or the invasion of Ukraine could trigger serious teething problems for your business, such as supply chain problems and acute labour shortages to the detriment of the company balance sheet and cash flow.

On the other hand, if the business is losing money as a result of its own failings, the business valuation will show a natural drop in value. If you are in this position, speak to a business broker with the experience and connections to tap into a network of buyers specifically on the lookout for business turnaround and restructuring opportunities.

Under the guidance of a seasoned turnaround professional, unprofitable businesses can quickly build value and generate a high return on investment following the restructuring of company finances and business operations. As such, professionals in the insolvency sector often buy unprofitable businesses as a restructuring project.

If you wish to value or sell an unprofitable business, arrange a free consultation with a member of the Selling My Business team of business brokers and business valuation experts. We are trusted by business owners around the UK to advise on business valuations and sell businesses.

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