Beyond market forces and size factors lies another crucial layer: risks that are unique to each individual company.
Even two companies of similar size in the same industry can have vastly different risk profiles based on their internal operations and dependencies.
Engagement Message
Can you think of one way two restaurants might face different risks despite being similar businesses?
Key person risk is one of the most significant company-specific factors. This occurs when a business depends heavily on one or a few critical individuals.
If the founder-CEO of a small tech company handles all client relationships and product development, their departure could devastate the business.
Engagement Message
Name one position whose sudden departure could seriously hurt a business.
Customer concentration creates another major risk. A company earning 60% of revenue from one client faces serious vulnerability if that client leaves.
Contrast this with a company having 1,000 customers where no single customer represents more than 2% of revenue.
Engagement Message
Which customer structure poses less risk, and why?
Operational risks include things like outdated equipment, regulatory compliance issues, environmental liabilities, or dependence on a single supplier.
A manufacturing company using 20-year-old machinery faces higher risk than one with modern, efficient equipment.
Engagement Message
Give an example of how dependence on a single supplier could hurt a business.
These company-specific risks directly impact valuation through higher required returns. Investors demand extra compensation for taking on these concentrated risks.
If comparable companies require 12% returns, a company with significant key person risk might require 15% or higher.
Engagement Message
Do higher required returns increase or decrease a company's calculated value?
