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 stands to reason 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, according to information provided by David Anderson & Associates, a business valuation expert providing forensic accounting services in Philadelphia. During this time period, 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, as described by the Philadelphia forensic accounting firm David Anderson & Associates, is Square – the financial services, merchant services aggregator, and mobile payment company based in San Francisco, CA. Founded in 2009, Square has yet to show a profit, 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 $30 billion.
A second example, similar to startup businesses, are those that are 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 are able to shed their debt. That makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company. In an example provided by business valuation expert in Philadelphia David Anderson, a Certified Valuation Analyst, iHeart Media (previously known as Clear Channel Communications) filed for bankruptcy last year. In January, the bankruptcy court approved a reorganization plan to reduce its debt from more than $16 billion to less than $6 billion. This past week, the company filed an S-1 Registration statement with the Securities & Exchange Commission (SEC) which could result in an IPO in the near future.
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.
