Business Valuation Risk Factors
Business Valuation Risk Factors Defined: In addition to the appraisal approaches, risks must also be taken into account when performing a business valuation. Risk factors will vary between companies, industries, and are likely to change over time. Generally, risks are categorized into three groups: business risk, financial risk and liquidity risk.
- Business risk: This is applied to all factors that may affect forecasted earnings. This includes any issue that may impact upon administrative and operating expenses, cost of sales and sales. Business risk is normally determined on a company specific basis, and requires the appraiser to understand the competition, industry, management focus and working capital of the company.
- Financial risk: This is applied to interest expense, which has the capability of affecting forecasted pre-income tax earnings. Financial risk is nearly always developed to be company specific and is assessed on a businesses asset base. Financial risk is considered to be minimal if the business if financed mainly by equity. Financial risk will likely be considered to be medium to high if the business is financed mainly with debt.
- Liquidity risk: This is applied to the process of disposing of a business at fair market value. Liquidity risk is not company specific, and is based upon the current industry.
Exact appraisal methods, conducted by a business appraiser, combined with an appraisal of risk factors for the business, are required to provide a company with an accurate business valuation. For this reason, a business valuation should always be conducted by a skilled business appraiser. Fussell Valuation Associates are skilled with seven Senior Professional Appraisers that have conducted business valuations for the past 30 years. Fussell Valuation Associates are USPAP 2008 - 2009 compliant and offer expert appraisal testimony should your valuation need irrefutable defense.
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