How to Value a Business in Decline

Valuing a growing business is relatively straightforward — profits rise, demand increases, and future earnings look promising. But valuing a business in decline is far more complex.

Whether the decline is temporary or structural, buyers, investors, and advisers all want to understand the same thing: how much of the current performance is recoverable, and how much has permanently gone?

Understanding that distinction is key to producing a fair and realistic valuation.

1. Start with the facts — not the fears

When a business is in decline, emotions often take over. Owners may focus on what the

business used to be worth rather than what it’s worth today. But valuations are rooted in data, not nostalgia.

Begin by analysing the last three to five years of financial performance:

• What has changed in revenue, margin, and cost structure?

• Is the decline sudden (a one-off event) or gradual (a long-term trend)?

• Has management already taken action to reverse it?

Buyers value trends and traction. Even a modest recovery can signal potential, while a steep, unmanaged fall raises risk and reduces value.

2. Identify the causes of decline

Not all declines are created equal. The reasons behind falling performance make a significant difference to valuation. Common causes include:

• Loss of a key customer or contract

• Rising costs or supply chain issues

• Leadership gaps or succession challenges

• Market disruption or new competition

• External shocks (pandemic, legislation, or currency movement)

A valuer will separate causes that are controllable from those that aren’t. For example, losing one major customer might depress short-term profit but be recoverable with a replacement contract. A shrinking market, however, suggests structural decline and a more cautious outlook.

3. Assess whether the decline is cyclical or permanent

A cyclical decline (for example, in construction or manufacturing) may still attract interest from buyers who understand the industry’s natural ups and downs.

A permanent decline, however — such as technological obsolescence or regulatory change — demands a different approach. In these cases, value lies less in earnings and more in assets, contracts, or intellectual property.

Determining where your business sits on that spectrum is crucial before any valuation exercise.

4. Focus on the underlying assets and strengths

When profits fall, intrinsic value still remains in:

• Tangible assets (property, equipment, inventory)

• Intangible assets (brand, customer data, IP, know-how)

• Skilled workforce and operational systems

• Recurring or contracted revenue streams

A strong balance sheet or loyal customer base can offset weaker profit trends. Experienced valuers look beyond the income statement to assess the transferable value within the business.

5. Normalise earnings — but stay realistic

Normalising accounts (adjusting for one-off costs, owner salaries, or exceptional events) can help reflect the business’s true maintainable earnings. But in a declining business, there’s a fine line between fair adjustment and over-optimism.

A credible valuation will acknowledge both sides — showing adjusted potential earnings and current actuals, allowing buyers to assess risk and opportunity. Transparency is vital for credibility.

6. Value future potential, not just past performance

A declining business with a clear recovery plan can still attract interest. Buyers often look for turnaround potential — undervalued assets, loyal customers, or inefficiencies they can fix.

If your business has identified a realistic path to stabilisation or growth (for example, new management, product diversification, or cost restructuring), that plan should be central to your valuation narrative.

The more evidence you can provide — forecasts, customer retention data, pipeline opportunities — the stronger your position becomes.

7. Choose the right valuation approach

Valuing a business in decline often requires more than one method:

• Earnings-based approach: Suitable if profits remain positive and the decline is recoverable.

• Asset-based approach: Appropriate where earnings are weak but tangible or intangible assets hold value.

• Discounted cash flow (DCF): Useful if a credible turnaround forecast exists.

• Break-up value: In severe cases, where continuation is uncertain, liquidation or net asset value may be more realistic.

An experienced valuer will combine these methods to produce a balanced perspective on both downside protection and upside potential.

8. Communicate openly with buyers and stakeholders

A declining business can still achieve a successful sale if expectations are managed. Buyers don’t necessarily avoid underperforming companies — many actively seek them as turnaround opportunities.

Be open about the challenges and clear about the plan. Credibility often matters more than the headline figure.

A business in decline still has value — but that value must be defined by evidence, not emotion. The goal isn’t to disguise the downturn, but to show where opportunity remains and how risk can be mitigated.

At BusinessValuation.co.uk, we help business owners understand the real-world value of their company — even in challenging circumstances — by assessing both current performance and future potential.

If your business performance has dipped and you’re unsure where you stand, our valuation specialists can help you take an objective view and plan your next move with confidence.