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, relying primarily 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. “So it 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, according to information provided by David Anderson & Associates, a business valuation expert providing forensic accounting services in Philadelphia, 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 offered by the Philadelphia forensic accounting firm David Anderson & Associates is Pinterest – the Internet company that allows users to create and share collections of visual bookmarks. Founded in late 2009, Pinterest didn’t even begin to generate sales revenue until 2014. But this didn’t stop investors from putting hundreds of millions of dollars into the company and valuing it by as much as $3.8 billion before it began to generate sales revenue.
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, says business valuation expert in Philadelphia David Anderson, a Certified Valuation Analyst, makes them attractive to potential investors who are focusing on the potential future profitability of the debt-free company. For example, until the deal unraveled recently over certain lease agreements, Florida developer Glenn Straub was willing to purchase the bankrupt Revel Casino for $95.4 million.
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.
