What Zero Value Means and Why It’s Rare

As an appraiser, a value of “zero” makes me nervous, and here’s why. A value of zero means that nobody would buy the asset at any price, regardless of the terms of sale. That’s a polarizing, absolute position that requires extreme conditions to substantiate.

Two Rare Instances: When Zero Value Made Sense

In my nearly 20-year valuation career, I can recall only two assignments whereby I concluded a zero value.

1. A light manufacturing company had not paid taxes since the early 1980s and was almost entirely staffed by undocumented aliens, and there were no financial statements of any kind (but there was an IOU of $200,000 to a guy I’ll call “Jim.”). So there were unknown tax, payroll tax, immigration violations, and who knows how many OSHA violations with unknown liabilities. Nobody sane would pay a dime to assume open-ended liabilities, so I was comfortable assigning a value of bubkis.
2. A convenience store had been cited for environmental contamination due to leaks from its gasoline tanks. And if you know anything about environmental costs, they are basically the timeshare from Hell. You don’t know how much the ultimate liability will be, and you don’t know when the claims will end. At least with a timeshare, you might get a vacation out of it. No one in their right mind would buy the convenience store in question. Value = zilch.

You might have noticed the common thread: if you want to get a zero value out of me, you must present unspecified and open-ended financial liability. Those conditions will never have a willing and informed buyer. By the way, both of those companies were profitable. The second one had a decent balance sheet (the first one, of course, had none at all).

Profitability vs. Value: The Paradox of Companies in Distress

What about companies that aren’t making money? Companies that don’t make money exhibit high values all the time. The whole venture capital industry is built on them. Even companies in distress have markets—there are distressed buyout funds that specifically seek out troubled companies they think can be turned around.

What about companies where one person has a ton of personal goodwill? I have encountered plenty of companies where the personal goodwill factor weighed heavily upon the valuation, but I have yet to encounter one where, after personal goodwill is considered, the company has no value. It doesn’t mean such companies don’t exist; I simply haven’t been engaged with them.

Unraveling Positive Values

What about companies that are insolvent? Such companies can often be liquidated at a positive value, often with debt being heavily discounted. A house still has value even if the value is less than the par value of the debt used to purchase it. Companies (or, more often, their assets) are often bought out of bankruptcy and at a Court auction.

And we haven’t even discussed assets that GAAP accounting generally fails to recognize, such as data sets, trade secrets, or internally developed technology. Such assets could add significant value to the company when they are fully considered.

Emphasizing the Importance of a Positive Value

To be clear, the foregoing analysis should not be taken to imply that companies in the aforementioned cases should be worth a great deal of money (though some are). The critical takeaway is that, in many instances in which it might seem that a company is worthless, a positive value thesis is more likely to be appropriate. It is much easier to challenge a value conclusion of absolute zero than it is to attack one where the value is perhaps minute yet distinct. If you’re involved in a valuation engagement where there is a concluded value of zero, you would be well-advised to view such a result with healthy skepticism.