Declining companies still offer optimistic prospects for investors with long-term views. If you’re in this position, here’s what you must know about valuing a declining business.
Not all companies experience a track record of non-stop growth. The UK is littered with listed companies that have seen dramatic rises and falls.
Take the Ocado Group as an example. As of Q1 2025, the online grocery retailer has seen its share price collapse by 75% in five years in the face of intense competition and post-pandemic consumer behaviours.
Yet declining companies still offer optimistic prospects for investors with long-term views and strong stomachs. If you’re in this position, here’s what you must know about valuing a declining business.
Why value an unprofitable business?
Just because a business is unprofitable today doesn’t mean it won’t be profitable tomorrow. Many businesses fall victim to factors out of their control, such as the broader economy. According to the Office for National Statistics, 25% of trading businesses reported a turnover decrease from October to November 2024.
Likewise, UK-listed companies are suffering due to the country’s stagnant growth, with 19.2% of UK-listed firms issuing profit warnings in the past 12 months. In short, none of this means an unprofitable or declining business can’t be turned around.
Valuing a declining company encompasses not just short-term profitability issues but the brand's overall value. For example, a comprehensive valuation also focuses on goodwill, an intangible asset like a brand’s name or reputation.
Ordering valuations of these companies unlocks investment opportunities and allows managing directors to arrive at the genuine fair market value of the business.
Issues when valuing a declining company
Valuing a declining company poses a unique set of problems. Before discussing them, it’s essential to define what a declining company is.
These companies possess one or more of five characteristics:
1. Stagnant/declining revenue
2. Decreasing/negative margins
3. Asset divestitures
4. Large dividends/stock buybacks
5. Unsustainable debt burdens
The problems associated with these companies lie with the uncertainty surrounding their future. These could include future cash flows, asset values and distorted earnings. Unfortunately, these issues may extend to the broader market, such as industry-specific challenges or changing consumer sentiment.
Any accurate valuation must account for this uncertainty to determine a valuation potential buyers or investors can rely on.
Work out Value with a Business Broker
Do you need to use an alternative method of valuation when valuing a declining company?
Traditional valuation methods often don’t work on companies with declining or negative revenues because they don’t properly account for the complexities the firm might be going through or the risks.
Instead, valuation methods like discounted cash flow (DCF), relative valuation and asset-based valuation are utilised, but with variations in discount rates to account for the risk and uncertainty that come with a declining company.
Valuation agents will also consider different distress scenarios. Distress scenarios are hypotheticals that analyse the potential outcomes of moves like corporate restructuring, asset sales, mergers/acquisitions or even bankruptcy.
In short, the overarching method might be the same, but tweaks will be required to adjust the valuation to a company that’s struggling.
How to value a declining business for sale
Selling a declining business may provide a new lease of life, especially if there’s significant goodwill associated with it. Whether you’re the buyer or the seller, the principle of getting the best price remains in place.
So, how do you value a declining business for sale?
The first step will be the same as any other business. Valuation agents dig into the various financial statements and the balance sheet to better understand the company’s situation, how the decline happened, and the likelihood of turning it around.
Next, a valuation agent will choose an appropriate valuation method. For example:
Value will also hinge on the turnaround potential of the company. What will it take to reverse the decline, and what’s the likelihood of success? The less work required, the more valuable the declining company will be to a potential buyer.
Again, goodwill plays a huge part in determining the value of a declining company. Intangibles, such as brand reputation and existing customer relationships, determine whether the decline can be reversed.
Of course, any calculations will have to incorporate the current level of risk. Lower valuation multiples or higher discount rates must account for the chance of further declines. Valuation agents must also look at the overall market dynamics.
For example, a declining company in a declining industry is far less valuable than one in which simple mismanagement is preventing a brand from benefiting from robust market growth.
Retailer X valuation example
How might this work in practice?
Let’s assume that Retailer X is on the decline and it’s been placed on the market. Last year, Retailer X reported annual revenues of £1.2 million, marking a 10% year-on-year decline. Its adjusted Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) is £100,000.
Retailer X possesses assets of £300,000 in physical property through its retail locations, £100,000 in inventory, and £150,000 in equipment. It also has £200,000 in outstanding debt.
Here’s what its value looks like under different methods.
Usually, valuation agents use multiple valuation methods to provide a broad range of values. With these values in mind, it’s up to the buyer and seller to negotiate and settle on a fair price for each side.
Valuing a declining company can get tricky because a recovery plan may be in place with strong prospects. With the complexities of determining accurate valuations for these companies, it’s crucial to have a reliable business broker by your side who can support you in netting a value that reflects the genuine value of the firm. To learn more, contact the team at Hilton Smythe today.