How would you value a company that has reported net losses 4/5 years

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February 06, 2024

by an investor from Purdue University in San Francisco, CA, USA

How would you value a company that has reported net losses 4/5 years? Would the SBA even lend on something like this?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. Lenders are not necessarily worried about the profits a company shows at year-end, as many business owners manage their bottom line for tax reasons. You need to look at the adjusted EBITDA. We have seen situations where a company is reporting losses, but the seller is pulling all of the cash out of the company via salaries, rent expense, management fees paid to a related entity, etc. If there is cash flow from an adjusted EBITDA standpoint to support debt service, of course after adding back a fair salary for the buyer, then you can certainly finance the business even if it is reporting losses on the tax return. However, if there just is not any cash flow even on an adjusted basis to the support the loan, financing is not going to be an option.

It is almost impossible to finance the acquisition of a standalone business if there is not enough cash flow to support the debt. The only way I have seen it done when there was not enough cash from the entity being purchased is when it was an add-on to another entity and there were other cost savings and cash flow for the existing company the buyer owned that would support the debt service.

I hope this helps. Please let me know if you have any additional questions or if you need assistance looking at the business cash flow to make a decision. You can reach me here or directly at redacted Good luck.
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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA
SBA requires last year and YTD to be positive to lend. As Roger states, you need to look at adjustments. The bank looks at debt coverage ratio at usually 1.4+ or should be higher. A lot of small businesses try to minimize taxes but usually don’t take them into the red. Turnarounds usually don’t turnaround. Without a lot of experience in the industry and with turnarounds, probably not a good investment.
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