If S7-PLCSIM is running but Factory I/O can’t connect and displays an error stating " It seems that S7-PLCSIM is not running " the problem probably lies in Factory I/O not being able to find S7-PLCSIM due to lack of permissions or different access privileges. Try running both S7-PLCSIM and Factory I/O as administrator:
Right-click on the Factory I/O icon and select ‘Run as administrator’ from the context menu.
Do the same with S7-PLCSIM. Then start the simulation in S7-PLCSIM, wait for it to finish loading, and try connecting in Factory I/O.