How Do You Evaluate a Company that is not Profitable?

Even a non-profitable company can possess substantial or strategic value. The choice of the appropriate valuation method depends heavily on the individual situation: on the asset structure, market opportunities, and the goals of the owners. A combination of several methods often provides the greatest informative value.

The Book Value Method

This is a frequently used and comparatively easy-to-apply valuation method.

What is Meant by Book Value?

The book value of a company is the calculated value of equity according to the balance sheet – i.e., the difference between total assets and liabilities. In its simplest form, it is:

Book Value = Assets – Liabilities

This takes into account all assets on the balance sheet (e.g., machinery, real estate, inventory, liquid assets), minus existing liabilities (e.g., loans, payables to suppliers). With this method, the book value of the company is determined by calculating the equity (total value of assets minus liabilities). This approach can be useful if the company has assets that exceed its liabilities.

When is the Book Value Method Useful?

Especially for non-profitable companies, the book value can be a first indicator, particularly when:

• There are valuable assets (e.g., real estate, brand rights, machine parks)
• The company is not considered a “going concern” (i.e., not continuing) – e.g., in cases of planned liquidations, sales of individual parts, or in restructuring situations.
• There is a stable asset value, independent of current earnings

Important Notes on Application:

The method says nothing about the earning power or future potential of the company.

The balance sheet value often does not reflect the actual market value. Assets such as real estate or machinery may be either under- or overvalued. An adjustment based on current values is recommended.

Intangible assets such as brands, customer bases, or know-how are often not or only partially recorded on the balance sheet – they remain unconsidered in the pure book value method.

Asset Value Method

What is My Company Worth “in Parts” – without Looking at Profits?

The asset value method considers the value of tangible and intangible assets available to the company – regardless of whether profits are currently being generated or not. It is particularly suitable when there is operational substance but the earnings situation is weak.

What is the Asset Value?

The asset value indicates what it would cost to build an identical company today – with the same assets, in the same location, with comparable equipment.

A distinction is made between:

• Reproduction value: What does it cost to restore the existing substance equivalently?
• Liquidation value: What does the sale of the substance bring on the market (see separate method)?

Asset Value = Current Value of All Operating Assets – Liabilities

The operating assets can include, for example, land, buildings, machinery, vehicle fleet, inventory, technical equipment, software, patents, brands (if assessable), etc. Not considered are the customer base, business model, or know-how – unless these are tradable.

When is the Asset Value Method Useful?

• For minimum value determination, if there is no significant earning power
• For non-profitable companies with substantial assets (e.g., production facilities, real estate owners, technical service providers)
• In restructuring or sale preparation, when the company may be broken up or sold off gradually

Special Features Challenges:

Intangible values are often not or only difficultly captured – especially for non-listed companies.

Pure balance sheet values are often not market-appropriate – a valuation at current values is essential.

Useless or outdated assets (e.g., oversized facilities) may need to be written off.

The net asset value method provides a factually sound valuation basis for companies with real economic substance – especially when there is no or only limited profit potential. It is well-suited as a lower valuation limit, but does not replace an income- or market-oriented approach if there is future potential.

The Liquidation Value Method

How much is My Company Worth if it Had to be Liquidated?

When a company is not profitable, the question often arises: What remains if I cease operations and sell all assets? The liquidation value method provides a clear, albeit rather conservative answer.

What Does “Liquidation Value” Mean?

The liquidation value is the estimated proceeds that could be achieved if all assets of the company were sold and all existing liabilities settled with the proceeds – essentially the “residual value” of the company in case of dissolution.

It is typically lower than the book value, as a quick liquidation often only achieves fire sale prices.

Liquidation value = realistic sales proceeds of all assets – liabilities – liquidation costs

When is the Liquidation Value Method Useful?

This method is particularly relevant in the following situations:

• In succession or sale considerations, when potential investors want to estimate the minimum value of the company.
• When the company no longer expects long-term returns or no buyer can be found for the business operations as a whole.
• In insolvency scenarios, in restructuring cases or as a worst-case scenario in strategic planning.

Factors You should Consider

Estimate the sales proceeds realistically. Machinery or inventory often fetch less on the open market than their book value. Real estate, on the other hand, can achieve higher values.

The time factor plays a role: The faster the liquidation needs to happen, the lower the sales proceeds usually are.

Consider liquidation costs (e.g., brokers, legal advice, staff reductions, contract terminations).

Take into account the tax aspects when dissolving hidden reserves.

DCF Method (Discounted Cash Flow)

Can My Company Have Future Value despite Current Losses?

The Discounted Cash Flow method (DCF for short) is one of the most frequently used methods for company valuation – especially for companies considered viable as a going concern and possessing future value potential, even if they are not currently generating profits.

The basic idea: The value of a company is measured by the future financial surpluses (cash flows) it can generate for its owners. These future cash flows are discounted to their present value using a so-called discount rate (often based on the cost of capital).

Value of the company = Present value of future cash flows

The rule is: The riskier and more uncertain the future earnings, the higher the discount rate – and thus the lower the current company value.

Application for Non-Profitable Companies:

Even if no profits or even losses are currently being generated, the DCF method can be useful if:

• a turnaround in business development can be realistically planned (e.g., through restructuring, new products, or market expansion),
• there is a plausible future scenario with positive cash flows,
• investors or owners take a long-term perspective.

In these cases, a so-called “ramp-up scenario” is typically calculated: The first few years show negative or low cash flows before a sustainable positive development sets in.

Challenges Pitfalls of the DCF Method

The capitalization rate is crucial: The chosen interest rate must adequately reflect the risk – an overly optimistic assumption quickly leads to inflated values.

High dependence on assumptions: Revenue growth, margins, investments, market development – small changes can have big impacts on the value.

Planning uncertainty: For unprofitable companies, forecasting is naturally riskier. Sensitivity analyses are therefore essential.

Market Value/Multiplier Method

What Do Others Pay for Comparable Companies – Even if They are not Currently Making a Profit?

The market value or multiplier method is not based on your own company data, but on what is paid in the market – for example, in company sales, takeovers, or initial public offerings. It is practical and oriented towards real transactions.

Company value = Multiplier × Reference value

Industry-standard multipliers are used that could be observed in a recent transaction of a comparable company. In the case of non-profitable companies, the multipliers typically relate to revenue or industry-standard key figures.

Application for Non-Profitable Companies:

The method is particularly helpful when:

• The company is attractive due to, for example, customer base, platform effects, or scaling potential
• There are no profits, but relevant revenues or market shares
• Comparable deals are known in the industry (e.g., through MA advisors, databases, industry reports)

What are the Opportunities Risks of this Method?

Comparability is critical: An appropriate industry comparison is crucial – differences in business model, size, or region can strongly influence the significance. Especially in the case of smaller companies, where figures are rarely published, it can be difficult to obtain reliable numerical data.

If figures are available, this method stands out due to its market proximity: The values are based on real purchases and reflect the actual willingness to pay.

High volatility: Multipliers can fluctuate strongly depending on the market phase

Overview: which Method when?

Company situation	Recommended method(s)
Substance available, no earnings	Substance value, Book value, Liquidation value
No future prospects	Liquidation value
Restructuring or turnaround scenario	DCF, supplemented by substance value
High market value due to customers, platform, brand	Multiplier method, possibly DCF
Business closure planned	Liquidation value, Substance value