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Business Valuation Services

We provide you with well-supported analyses and astute advice in our valuations of your businesses, business interests, assets, liabilities, and invested capital. Whether your business is a publicly traded corporation or privately held company, we find the solutions you need.

Beyond Beta

Beyond Beta

Assessing Industry Risk is a Critical Part of the Valuation Process
Valuation professionals typically factor industry risk into the cost of capital, using a “beta” or other industry-specific risk premium. But industry risk isn’t something you factor in once and then forget about. It’s something the pros consider throughout the valuation process — and its relevance even extends beyond the income approach. Here are some questions your expert considers when evaluating industry risk.

What’s the Correct Industry?
Simply put, an “industry” is a group of people or companies engaged in a particular kind of commercial enterprise. Industries are broadly defined, for example, as retail, manufacturing, hospitality or agriculture. Then they’re subdivided into more discrete categories, such as fast food establishments, pizzerias and full-service restaurants.

When considering industry risks, the first step is to identify the products and services the subject company produces. Then the expert defines the industry (or industries) the business operates in. For a complete list of industry codes for North America, visit the North American Industry Classification System codes and titles at

Defining a company’s industry can be critical when benchmarking performance or selecting comparable transactions to use under the market approach. This information can also be helpful when forecasting future cash flow, including, for example, any adjustments for accounting methods that differ from industry norms.

Keep in mind, though, that some businesses are generalists while others serve a narrow market niche. If you’re valuing a management consulting firm, for instance, it might provide a full menu of financial services, such as tax, audit, financial advising and employee benefits consulting. Alternatively, it might be a boutique firm that specializes solely in preparing tax returns. Direct comparisons between these two professional services providers may not be meaningful.

What’s the State of the Industry?
Like products, industries go through a life cycle: start-up, growth, maturity and decline. Experts evaluate historic performance to see where a company’s industry falls along this continuum.

Pinpointing the industry’s life cycle phase helps gauge where the company is headed and helps identify potential threats and opportunities. It can even impact the company’s future capital structure. An industry in the growth phase, for instance, faces rising demand for products and services, which may cause a subject company that participates in the industry to take on debt to fund growth. Conversely, a mature industry might mean that the subject company is a “cash cow” that can afford to pay down debt, thereby increasing the percentage of equity in its capital structure.

A surface-level understanding of how the industry works won’t suffice. Valuation experts who make broad-sweeping conclusions based on generic market trends are likely to under- or over-value the business. For example, companies that operate in a declining market can still grow. In fact, some even gain market share as competitors go out of business.

Who’s Participating?
It’s also important to research companies that sell similar products and services. Are there any new competitors on the horizon? Often valuators try to understand competitors’ products, pricing, reputation, financial position, channels of distribution, technology, market share and business models. Then they assess how the subject company measures up in terms of its strengths and weaknesses.

From there, valuators assess how the business competes within its industry. Price is vital for commodity or retail sales, but delivery, quality and reliability might be more relevant criteria for manufacturers or contractors. Alternatively, emerging competitors might steal market share due to technological advantages, cheaper prices or more efficient distribution models.

Valuators also look up and down the supply chain to gauge the relative power of suppliers and customers. Businesses with few partners may possess concentration risks. If a major supplier or customer discontinues its relationship with the subject company or merges with another company, it could interrupt normal business operations significantly.

A Team Effort
An industry with a bright outlook could well enhance the value of a subject company — conversely, a declining industry could also impair a company’s value. By working with clients and attorneys, valuation experts can select the correct industry and assess how industry risk affects value. Accurate valuations hinge on taking the time to thoroughly understand the subject industry and where the subject company fits within that group.

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