David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.
Uncovering value in an unprofitable business might seem to make as much sense as wringing water out of a rock, but – by putting forensic accounting principles to work – a knowledgeable business valuation expert can do just that.
“Business valuators look to three primary methods for valuing a business: The Income Method, the Market Method, and the Asset Method. Most primarily rely on the Income Method because a ‘hypothetical’ buyer is looking for value from the profits and cash flows of a business,” said David Anderson, a Certified Valuation Analyst and principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley. “It then makes sense that if a business isn’t making a profit, it would not be of any value to a potential buyer. That, however, is not necessarily true.”
How can this be? There are several scenarios under which an unprofitable business can have value.
The first is a startup business. Typically, the costs of starting up a business and ramping up its sales can take several years. During that time, the business usually operates at a loss. However, because of the future earnings potential, investors are willing to give a business value based upon this potential. Case in point: Bright Health Group, which owns and operates medical clinics as well as provides health care insurance, lost over $500 million in 2021. But this hasn’t stopped investors from putting hundreds of millions of dollars into the company. Today, it is publicly traded with a market cap of over $2 billion.
Similar to startup businesses are those in bankruptcy. Such companies typically have been unable to produce sufficient profits to cover operating costs and debt service (the cost of repaying debt with interest). Through the bankruptcy process, these companies can shed their debt. That makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company. For example, last year, Luckin Coffee, a Chinese rival to Starbucks, filed for Chapter 15 bankruptcy in the U.S. Today, although it has not yet emerged from bankruptcy, it is still publicly traded with a market cap of over $3 billion.
A third type of unprofitable business that can have value is one that has assets whose value exceeds the liabilities and debts of the business. In this case, notes David Anderson & Associates, a business valuation expert in Philadelphia that also serves as a Philadelphia forensic accounting firm, a potential purchaser is less concerned with the profitability of the business it is acquiring because it is focusing primarily on the assets of the business, and the value of incorporating those assets into the purchaser’s business. Case in point – Sun Pharma, the largest pharmaceutical company in India, has pursued a strategy of buying unprofitable drug makers and merging their operations into its own. In fact, says David Anderson, a Certified Valuation Analyst offering forensic accounting services in Philadelphia, Sun Pharma has made 10 such acquisitions totaling several billion dollars over the past 15 years.
Unprofitable businesses can have value to the “hypothetical” and real buyer, concludes David Anderson, a business valuation expert in Philadelphia. In each of these scenarios, the purchaser sees the potential for value in the future operations of the business.
If you require the services of a Certified Valuation Analyst, or business valuation expert in Philadelphia, or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner, a Certified Valuation Analyst, and a business valuation expert in Philadelphia.
