Occasionally, there will be valid reasons why a good buying opportunity will be a business that is not yet profitable or no longer profitable. If such is the business you’re offering-for-sale, be ready to explain to a buyer exactly what makes your unprofitable business a good opportunity.
The value of a currently unprofitable business will depend on whether there is profitability just around the corner and the level of that profitability, or whether the business is just simply unprofitable. In either event, the business will be worth the value of its assets plus the value of its goodwill (if any; and if any will depend on what IS seen around the corner).
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The value of the assets may depend on a host of variables; share sale, asset sale, book value, fair market value, condition, demand, location, placement, etc. Are they the operating assets of a viable on-going business concern and valued as such, or are they the assets of a business that is NOT viable as a going concern.
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The value of the goodwill will depend on whether and to the extent the business is a viable sustainable on-going business concern, or perhaps, to the extent the business can be credibly predicted to become a viable profitable business concern.
Asset value can usually be accomplished in a definable, defensible method; book value, replacement value, appraised value, fair market value, etc., but goodwill is typically valued on the basis of the business’s ability to generate earnings; profitability.
- If your business-for-sale is a start-up that has just not yet achieved profitability, be ready to detail the path to profitability.
- If your business-for-sale has been in business for a while and not achieved profitability, be ready to explain why you’ve not done so, and why/how the business can do so now.
- If your business-for-sale has been in business for a while and has been profitable, but is not now, be ready to explain why it was lost and why profitability is re-attainable and sustainable.
If your business-for-sale has been in operation for any time, it will have a financial history; financial statements and/or tax statements. Whether good, bad or indifferent; relevant or irrelevant, beneficial or not, the buyer will want to see what the business HAS done, financially.
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Many business-owners tell us, “the reason we’re not profitable is we take it all profits out at year-end.” That’s not a problem. In fact, you may be profitable. The full story may not be evident on the surface of the financial statements, but can be uncovered through recasting.
- Others will tell us, “profits are off the books.” That IS a problem. Experienced buyers will run from this. An experienced buyer will pay only for what can be verified.
When a business cannot convincingly demonstrate and/or credibly project a sustainable level of profitability under new ownership, or sustainable contributions the buyer’s profits elsewhere perhaps, then the business is unlikely to hold any goodwill value for a buyer. In such case, the value of the business, in our view, will probably be equal to the value of its assets, and the opportunity to purchase the capital assets of the business may be a good opportunity for someone but, ‘assets’ might include more than just the capital assets.
- The opportunity to purchase the client list may represent a good opportunity to someone.
- The rights to designs or products or license, etc., may be good opportunity for someone.
- The opportunity to get you out-of-business might be worth something to your competition.
see: very small businesses |
