Risk Appropriate to the Valuation Subject

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There are numerous risks that are continuously changing and redefining the environment in which the valuation subject does business. Risks that are frequently common to business and their customers include economic conditions, regulatory influences, financial standards and interest rates levels. Other types of risk are more industry and market specific influences creating strategic options for management.  

The Valuation Profession has adopted and refined various methods to apply when identifying and adjusting for risk appropriate to a specific company in a specific circumstance.  Normalization is an essential method when adjusting the financial statements of a subject business to a fair market or industry "normal". 

(This effort normalizes the bias management may apply in the use of company resources, as reflected in its financial reporting, to a more common economic basis expected of any market participant):

• Departures from Generally Accepted Accounting Principles ("GAAP").
• Relevance of nonrecurring and unusual items.
• Extraordinary (excessive or diminished) transactions in contrast with a market normal. 
• Purpose for nonoperating revenues or expenditures 
• Tax specific options with strategic opportunities i.e., accelerated depreciation.
• Other strategic choices that require ownership approval.  These items identify perquisites to the owner or employees which are frequently discretionary to management style.

(In business valuation, a discount rate is the rate-of-return that will convert a benefit stream into a present value. The discount rate appropriate to a specific measurement can be constructed from various market and industry-based component rates that are unique for specific time frames. One of the components in the construction of a discount rate that is appropriate to a specific measurement at a specific point in time is the risk directly associated with the business, i.e. the source of the stream of benefits being considered). 

Company Specific Risk considers similar factors that influence the economy, industry and market in general but focuses on the "why" and "how" these risks are augmented or diminished at the company level.  What are the unique operating characteristics of the company that enhance or reduce the influence of specific risk components that are introduced as other market or risk components of the total build-up of the discount rate. Some common considerations will include:

• Recent changes in company management strength or capabilities.
• Loss of proprietary employee skill sets or systems.
• Patents, trademarks, or copyright advantages / disadvantages. 
• Location and amenity characteristics.
• Access to roadways, transportation systems, or storage. 
• Limitations on access to a diversified consumer base.
• Contract arrangements with vendors, suppliers, professional staff.
• Local government regulations and licensing or restrictions.
• Cash flow limitations resulting from management strategies or investments.
• Other unique factors which may have short-term or long-term limits.