How do I value a business that is losing money or has no profit?

A business with no profit can still have value, but the usual starting point needs care. BDC says valuation often begins with assessing operating earnings. It also notes that a company may have no net profit but high EBITDA, so first check which measure is actually negative. The question becomes which approach fits your situation. Be ready to explain why the business loses money.

The method follows the business

BDC says the most suitable combination of valuation methods depends on the purpose of the valuation and the company’s characteristics, such as its profitability, future outlook and asset mix. So no single formula is set for a loss-making company. Your answer comes from looking at what the business has, where it is heading and who is asking.

When earnings methods fit and when they do not

BDC says earnings-based approaches are commonly used for established businesses that are generating reasonable returns and whose value is greater than that of their assets alone. A business with no profit may not meet that description. BDC adds that asset-based approaches are typically used for businesses whose value is asset-related rather than operations-related, for example in the real estate sector, and that these approaches are also applied when a business generates poor returns or is expected to be liquidated. Ask the valuator which description fits your business.

Forecasts, and the risk of optimism

In earnings-based methods, BDC says a valuator determines value by reviewing forecasted earnings or cash flow along with past results. BDC lists making unrealistic assumptions in cash flow or earnings projections as a valuation mistake. Be ready to explain what changed, what will change and what evidence supports it. BDC describes EBITDA as a measure of operating performance that does not account for non-operating expenses such as interest on debt, taxes and other costs, so look at those too. See what is EBITDA.

An independent view

The CBV Institute says that when a decision turns on what a business is worth, you need an independent, credible answer that holds up. It says a Chartered Business Valuator applies professional judgment to the facts rather than formulaic analysis or unsupported assumptions. For a loss-making business, ask whether a CBV should do the work.