Thinking about buying a business that's losing money? It’s a tough decision—on one hand, there's potential, but on the other, the losses can be daunting.
Valuing a business that’s losing money isn’t as simple as looking at profits.
But here’s the secret: sometimes, the true value lies beyond the numbers.
A strong brand, loyal customer base, or untapped growth potential can turn a struggling business into a hidden gem.
In this guide, we’ll show you how to value a business that’s losing money and make a smart, confident investment decision.
How Do You Value a Business That Is Losing Money?
Valuing a business that’s losing money requires you to take a deep dive into its potential beyond current financial struggles.
This is based on the simple fact that a loss-making business may still hold valuable assets, growth potential, or strategic advantages that could make it worth the investment.
To gauge the worth of such a company, you’ll need to consider key metrics like revenue potential, market position, customer base, and underlying assets.
Below, we delve into some of the best valuation strategies for money-losing companies…
Revenue and Cash Flow Analysis
When dealing with a business that is not currently profitable, focusing on its revenue and cash flow insights can open your eyes to its hidden potential.
Here’s how to go about it:
1. Check the revenue trends and growth potential
Evaluating the revenue trends of the business will provide you with a sense of the business’s performance over time, helping you determine whether it’s worth the risk despite its current state.
Specifically, you need to focus on the following:
Revenue growth rate: Calculate the revenue growth rate of the business over the last 2–3 years to identify upward or downward trends.
Industry benchmarking: Compare the business revenue with its industry peers. This way, you’ll see if its losses stem from broader market trends or due to internal inefficiencies.
A company with consistent revenue growth, even amid losses, may indicate strong demand and future profit potential.
2. Cash flow projections
Cash flow projections can give you valuable insights into whether the business you’re eyeing is expected to turn profitable soon, helping you weigh the financial risks. Here’s how to do it:
Discounted cash flow (DCF): Project future cash flows, then discount them to present value, especially helpful for startups or growth-stage businesses.
Break-even analysis: Identify when the business is projected to reach break-even, providing insights into its profitability timeline.
Asset-Based Valuation
Another approach to valuing a troubled business is to consider its tangible or intangible assets.
1. Tangible Assets
Physical assets, such as real estate, machinery, or inventory, can add significant value to a business.
Even if the business itself is unprofitable, selling off these assets can partially or fully recoup your investment.
We recommend reviewing the balance sheet to calculate the book value of physical assets.
You can then proceed to estimate the liquidation value, especially in cases where the assets may be sold if the business fails to recover financially.
2. Intangible Assets
Intangible assets—such as intellectual property (IP), brand reputation, or customer base—can also make a loss-making business valuable.
The most common intangible assets of any business include:
Brand value: Assess brand strength, especially if the company has a loyal customer base.
Intellectual property: Patents, trademarks, and proprietary technology can offer unique competitive advantages.
Customer contracts and relationships: Long-term customer contracts, even in a loss-making business, provide guaranteed revenue streams.
Market Position and Competitive Advantage
A company’s market position and competitive edge can also increase its value, even if it’s currently losing money.
In this case, the key areas to focus on include:
Market share and industry position: Analyze the business's share in its industry to determine its strength and appeal. If the business holds a significant market share, it may be worth acquiring for strategic purposes. Also, evaluate industry growth rates to determine if the market itself is expanding, offering future revenue potential.
Adjusted EBITDA Valuation
Adjusting EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is another viable method for reflecting the true operating profitability of a business and giving you a clearer picture of its value.
To employ this method, consider the following:
1. Adjusting for Non-Recurring Expenses
Remove one-time or non-recurring expenses that may have skewed profitability, such as legal fees or restructuring costs. Such expenses include:
Owner’s salary: In smaller businesses, removing the owner's salary can adjust the EBITDA closer to what a buyer would experience.
One-off expenses: Deduct significant but non-recurring expenses to give you a more accurate snapshot of potential earnings.
2. EBITDA Multiples
Using an EBITDA multiple allows you to estimate value based on comparable businesses. This is how to do it the right way:
Research industry standards: Check the average EBITDA multiples within the same industry for context.
Discount for financial losses: Apply a discount to the multiple to account for the higher risk associated with buying a loss-making business.
Potential for Cost-Cutting and Profit Improvement
Yes, assessing a company’s potential for operational improvement and cost-cutting measures can be a powerful indicator of its future value. Here, you should focus on:
1. Operational efficiency: Examine inefficiencies and identify areas for cost reduction in the business. Analyze categories of a company with high spending, such as staffing or production costs, to find potential savings. Also, identify any redundant roles, excessive overhead, or costly processes that you can optimize or remove completely.
2. Revenue expansion opportunities: Consider if there’s an opportunity to increase revenue without significant additional expenses. For instance, can expanding offerings attract new customer segments? Or will entering new markets help reduce dependence on one source of income and stabilize revenue?
Risk Assessment and Due Diligence
As with any other type of acquisition, risk assessment is essential when acquiring a business that is losing money, as the investment risk can be high. The key areas to focus on in your due diligence journey include:
Financial risk and debt load: Check for any outstanding debt and understand the company’s debt obligations. If you uncover high debt-to-equity or debt-to-asset ratios, this could signal financial instability. You’d also want to consider if restructuring debt will help improve cash flow and profitability.
Market and operational risks: Evaluate potential market risks or operational issues that could impact the business post-acquisition. For instance, consider how economic downturns might affect the business’s performance. You should also identify whether the business is overly reliant on a small number of suppliers or vendors.
Final Thoughts
Valuing a business that’s losing money requires a holistic approach that combines revenue trends, asset value, and market potential with strategic insight. With the right adjustments and a keen eye on growth opportunities, you can reveal value in what may initially seem like a risky investment.
If you're considering a business that seems risky, our team is here to help you uncover its hidden potential.
With our acquisition program, we handle the entire process on your behalf—from acquiring a below-market-value e-commerce business and negotiations to due diligence. We’ll also handle scaling your investment for value enhancement and ultimately help you exit for a 3-10x multiple.
Book a free consultation call today and let's get started!
