How do you evaluate a business with significant fiscal losses ?

December 13, 2024

by a professional in Montréal, QC, Canada

How do you approach evaluating a business with significant fiscal losses and high debt?

I'm curious to hear from the community about how you assess the value and potential of a business that shows a history of fiscal losses and carries a substantial amount of debt. Do you focus on growth opportunities, asset value, management quality, or something else? What key factors or red flags do you consider when deciding whether such a business is worth investing in or acquiring?

Looking forward to your insights!

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Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA

From a finance perspective, even businesses that are not currently profitable are valued in the same way: as a series of discounted cash flows. So you first build a model to estimate the value, parameterizing those variables that you can control. Then you should perform both scenario analysis and, if you are sophisticated enough, Monte Carlo modeling to understand i) what parameters have the greatest impact and ii) what your range of expected values might be.

If you can control growth opportunities, asset values, and management quality, then these factors can be quantified and modeled. For example, growth opportunities might be modeled by making them a function of your marketing spend.

There are two outputs and one input that help you decide whether to proceed. The first is Net Present Value: if it is below $0, steer clear. The second is Internal Rate of Return, and obviously higher is better. The input is your cache of capital, as it may make financial sense to engage in two projects that utilize 100% of your capital as opposed to one project that uses 80% and leaves the remainder undeployed. If the need arises, there are optimization algorithms that can help you decide which among many alternative projects to deploy.

Reply by a professional
in Crystal Bay, NV, USA

Thanks Luke...in my experience, I would tend to look at asset values. that said, there is no mention of what assets are owned or if they debt is on the assets. I'd ask myself what am I buying? Customers? Assets? Cashflows? Brand? I noted Jeff's comment about discounted cash flow and that is an approach. But there are no positive cash flows as I understood, so you'd have to determine is there is expense bloat and if you could got it prior to taking ownership. I have bought businesses that were losing money and essentially closed the sale and had to hire back the people we wanted and purged the business of expenses. Go in with your eyes wide open. I think the easy answer is to walk away before you get in to deep. But its going to take a lot more work to figure it out.

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