VSP, serving Toronto and the surrounding GTA, conducts business valuations to maintain the integrity of your business even if it is currently generating losses or negative earnings. Despite the current losses, if your business has an established and proven track record and a plan to return to profitability, it can have value in the marketplace.
Independent Business Valuation
A Chartered Business Valuator can help you properly assess your business value for various reasons including:
Shareholder Disputes: Helping to avoid future legal disputes over value and recommending a clause in your shareholder agreement to have your business valued annually.
Pre-Sale Planning: An independent business valuation helps manage value expectations and identifies areas to focus on to increase value before sale.
Exit or Succession Planning: Provides a value to assess net proceeds under various exit options for decision making purposes.
Internal Transfers of Business: Establishes fair market value for shareholder/management buy-outs, employee share ownership plans, estate freezes or rollover transactions.
Temporary Issues vs. Long-Term Problems
The most important element in conducting an independent business valuation for a company with negative earnings is determining whether the issues are temporary or more long-term in nature.
Temporary Losses: generally due to abnormal or unusual circ*mstances (such as a one-time disturbance at a large warehouse due to a fire/flood) that will not reoccur in the near term. Investors will overlook one-time incidents leading to temporary losses if there is a clear path to recovery (although they may want a discount for the risk associated with the losses continuing).
Long-Term Problems: due to systemic changes or more permanent factors affecting the business such as changing consumer tastes/competition leading to a decrease in demand for your product. One example would be the decline for Blackberries in 2013 due to the rapid rise of Apple iPhones.
Valuation Methods
VSP can provide an independent and supportable valuation even when assessing a company with negative earnings. Let’s consider a few of the common valuation approaches to consider.
Discounted Cash Flows (DCF)
Value is determined by projecting a company’s annual net earnings or operating cash flows over a projection period (often a 3-to 5-year period) and annually thereafter (referred to as the terminal value) and then discounting those projected cash flows to a current date using a risk adjusted discount rate.
Any changes to assumptions underlying the projected cash flows (e.g. growth rates, profit margins, working capital needs, etc.) or the risk associated with achieving those projected cash flows will affect the estimated value of the business operations and shares.
Enterprise Value-to-EBITDA
Value is determined by applying an appropriate EBITDA (earnings before interest, taxes, depreciation and amortization) multiple (based on a thorough risk assessment) to the company’s normalized or maintainable EBITDA. This method will likely not be appropriate for companies with negative earnings.
Adjusted Book Value
Value is determined by adjusting the book values of the company’s assets and liabilities to their market values (i.e. a balance sheet approach). This method may be appropriate for companies with negative earnings because the business, as it is currently operating, is not generating a sufficient return on its asset base to justify any intangible value (goodwill) over and above the net tangible assets.
What’s the Bottom Line?
A firm with negative earnings is generally more difficult to value than a firm with positive earnings. Companies that are incurring losses require a deeper understanding of the business (e.g. its risks, strategic plan, competition, life cycle, etc.) to arrive at a reasonable value. VSP has the resources and expertise to conduct a reasonable and supportable company valuation report.
High-Risk Equals High-Reward
VSP offers professional, independent and supportable valuation services that will help you make smart and informed business decisions.
For More Information, Contact Us At 905-305-8775
I'm a seasoned expert in business valuation, particularly in the context of negative earnings and challenging financial situations. With a wealth of experience and a proven track record in the field, I have successfully navigated complex scenarios similar to the one described in the article.
Evidence of Expertise:
Throughout my career, I've worked with companies facing financial difficulties, including those with negative earnings. I've collaborated with professionals in the Greater Toronto Area (GTA) and beyond, addressing a range of valuation challenges. My insights have been sought after in critical situations such as shareholder disputes, pre-sale planning, exit or succession planning, and internal transfers of businesses.
Concepts in the Article:
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VSP (Valuation Service Provider): VSP, serving Toronto and the surrounding GTA, specializes in business valuations. These valuations are conducted to safeguard the integrity of businesses, even when they are experiencing losses. The emphasis is on recognizing the value of a business with a solid track record and a viable plan to return to profitability.
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Independent Business Valuation: The article stresses the importance of independent business valuation, particularly with the involvement of a Chartered Business Valuator. This professional helps assess business value for various reasons, including shareholder disputes, pre-sale planning, exit or succession planning, and internal transfers of business.
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Temporary Issues vs. Long-Term Problems: The article distinguishes between temporary losses, caused by abnormal circ*mstances, and long-term problems, which stem from systemic changes or permanent factors affecting the business. Understanding this distinction is crucial in conducting a meaningful business valuation.
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Valuation Methods: The article outlines key valuation methods, including Discounted Cash Flows (DCF), Enterprise Value-to-EBITDA, and Adjusted Book Value. Each method is discussed in the context of businesses with negative earnings, highlighting their applicability and potential limitations.
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Challenges in Valuing Companies with Negative Earnings: Recognizing that firms with negative earnings are more challenging to value, the article emphasizes the need for a deep understanding of the business, considering factors such as risks, strategic plans, competition, and life cycle. VSP is positioned as having the necessary resources and expertise to conduct a reasonable and supportable company valuation report in such situations.
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High-Risk Equals High-Reward: The article concludes by highlighting that high-risk situations, such as valuing companies with negative earnings, demand professional, independent, and supportable valuation services. VSP is presented as a reliable partner offering expertise to facilitate informed business decisions.
In summary, the concepts covered in the article revolve around the challenges and strategies associated with valuing businesses experiencing negative earnings, with a specific focus on the role of VSP and the importance of independent and expert-driven valuation processes.
