For better or worse, many businesses in the economy are loss making – sometimes consistently and sometimes sporadically. We’re often asked by clients whether this means their business is worth nothing, and sometimes we’re asked (with some prompting about the underlying brand, intangibles or upside) whether such businesses have significant value. As with most matters, the answer will vary significantly. Herein we endeavour to unwrap this matter with reference to the typical questions and investigations we would take to discover the value of a loss making business.
What are the underlying assets?
Although a business may be loss-making (sometimes consistently so), some businesses hold underlying assets that hold value. Take for example a road transport business which owns trucks and trailers – such equipment is likely to have a value in itself which should be considered in the overall scheme of the business’ value. Further, consider a loss making software business – loss making as it consistently invests capital expenditure into building software that is likely to generate income in the future – such software may have value which should comprise some value for the business.
Is the loss making sustained or is profit-making likely to return?
Value, fundamentally, is the present value of future cash flows. In other words, value today is the price a hypothetical acquirer would pay, consistent with market value, to acquire the future cash proceeds that an asset is likely to produce. To this end, even if a business has been loss making for quite a while, if there is a clear path to profitability (not simply an ambitious target to be profitable or potential for same), such cash flows likely indicate that the business will have a value.
What if the business makes profit for its owner but is unlikely to be profitable if another person operated it?
Sometimes, specialist businesses like consulting or medical businesses may be profitable to their current owner, but won’t necessarily be profitable to another owner due to the skills, knowledge or relationships required to make money. How should these businesses be treated? For such businesses, a common argument put forwarded is that such businesses will be unable to be sold as the value lies with the owners skills, relationships and knowledge. However, from a pure valuation perspective, under the basis of market value, valuers are required to assume that in the hypothetical market, such assets can be transacted. In doing so, the value is typically constrained (often significantly) due to the relevant restrictions associated with hypothetically selling the subject business.
What if the business has no material asset holdings and no prospects?
Some businesses have no material asset holdings and minimal prospects. In such circumstances, the value of such businesses is typically very low. However it is important to investigate thoroughly these matters to accurately determine the appropriate value.
Find out more
Groves & Partners are expert business valuers, company valuers and share valuers. We have significant experience in undertaking business valuations for loss making, start-up and distressed companies.
Our team of business valuers includes Chartered Accountants, Registered Business Valuers and Certified Minority Interest Valuers. To find out more about our family law business valuation services please phone us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.