After exploring control premiums and marketability discounts, there's another critical adjustment that can significantly impact value: company size.

Smaller companies face unique risks that larger, established companies don't. These additional risks require higher returns from investors.

Engagement Message

Give one reason a small startup is riskier than Apple.

Think about it logically. A small company with 10 employees faces different challenges than Microsoft with 200,000+ employees.

Small companies typically have less financial stability, fewer resources, limited market presence, and higher failure rates.

Engagement Message

Name one advantage large companies enjoy over small firms.

This size-related risk shows up in required returns. If investors demand 8% returns from large companies, they might demand 12% from small companies.

That extra 4% is called the "small company risk premium" - additional return demanded for size-related risks.

Engagement Message

Would you be willing to invest in a small company if it offered the same return rate as a large one? Why or why not?

Here's why size creates risk: Small companies often depend heavily on key founders, have limited customer bases, face cash flow challenges, and struggle to compete with larger rivals.

Each of these factors increases the chance of business failure or poor performance.

Engagement Message

Which of the size-related risk factors feels most dangerous to a business?

The size premium directly affects valuation. If we use a 10% discount rate for a large company, we might use 13% for a similar small company.

Higher discount rates mean lower present values - so size premiums reduce valuations for smaller businesses.

Engagement Message

In valuation, does higher risk lead to a higher or lower value estimate?