How Industry Fits Into the Valuation Puzzle
Diane Glover
Dec 27, 2019

IRS Revenue Ruling 59-60 is an essential building block of modern appraisal practice. It identifies “the condition and outlook of the specific industry” as one of the factors to consider when valuing a private business. But how do investors measure industry risk and how does it fit in the valuation paradigm? Value is a function of risk and return. Riskier investments require higher returns, which lowers their values. Some rates of return can be easily and objectivity measured. For example, the return on the overall market may be measured by returns on a diversified portfolio of public stocks that are traded actively on the New York Stock Exchange, NASDAQ, and the American Stock Exchange.
However, private companies often participate in one industry, which may be more (or less) risky than a diversified portfolio of stocks. In a discounted cash flow analysis, the company’s discount rate must be adjusted (up or down) to reflect industry risk.
For example, assume that a small publicly held company in the general public market has an annual rate of return of 15 percent (as measured by the market for similar-sized public companies). If your business operates in an industry that’s less risky than the overall market, it may warrant a discount rate below 15 percent. Conversely, if your business operates in a volatile, high-risk industry, investors may require a higher rate of return than the overall market.
Introducing Beta
To measure industry risk, valuators typically turn to outside research firms that compute industry risk premiums (commonly known as “betas”) for public stock and credit analysts. Duff & Phelps publishes over 200 industry risk premiums in its annual Valuation Handbook. These premiums are determined by measuring the betas of representative public companies within each industry classification code.
Beta compares the industry’s historic rate of return to the historic rate of return for the overall market. A beta of one means that the industry generally moves in tandem with the market. When the beta is greater than one. that industry tends to be riskier than the market overall. Beta between zero and one means that the industry is less risky than the market. Although rare, Betas below zero are reserved for companies that move in the opposite direction than the market. In other words, the industry performs well in tough economic times and poorly in good times.
Industry betas based on public stocks don’t factor size or geographic location into the equation. Small industry participants may face different risks than larger players, especially conglomerates that participate in multiple industries. Small companies also tend to have fewer resources to weather temporary downturns in the economy.
So how do valuators determine the risk of operating a small private company? The industry premium (or discount) to apply to a required rate of return is a matter of professional judgment on the part of your appraiser. He or she might start with the industry beta, review industry trade publications and then make adjustments for size and company-specific risks.
Think Beyond the Valuation
Industry risk is an important consideration when valuing a private business. Valuators go to great lengths to support their risk assessments and conduct in-depth market research. Valuation reports often provide significant detail about industry risks and trends. This research has tremendous value beyond your company’s valuation. It can help owners and managers seize opportunities, anticipate threats and employ best practices to help build your company’s value.
Does your business need a valuation? Let’s talk about how Kirsch CPA Group can help you. Contact us at 513.858.6040

About The Author
As the Manager of Practice Growth, Diane focuses on the market awareness and growth of Kirsch CPA Group…
Tags
Sign Up for Email Updates
Related Articles





















Tax Treatment of Debt Forgiveness: Watch Out for Tax Bills Delivered COD
- 01-18-23
- Kirsch CPA Group












Manufacturers: Be Aware of These 3 Business Tax Provisions Currently in Limbo
- 01-18-23
- Kirsch CPA Group



The Tax Deductible Mileage Rate for Business Driving Increases for 2023
- 01-04-23
- Kirsch CPA Group









Succession Planning Considerations for Construction Business Owners
- 12-14-22
- Kirsch CPA Group






Prevent Fraud at Your Construction Company With a Holistic Approach
- 11-30-22
- Kirsch CPA Group









Manufacturers Must Act Now to Maximize Depreciation-Related Tax Breaks for 2022
- 11-09-22
- Kirsch CPA Group



It’s Time for Businesses to Rethink Their Working Capital Practices
- 11-09-22
- Kirsch CPA Group









Social Security Wage Base and Earnings Test Amounts Increase in 2023
- 10-27-22
- Kirsch CPA Group



New Law Enhances Payroll Tax Break for Small Manufacturers’ Research Expenses
- 10-13-22
- Kirsch CPA Group







































How Buy-Sell Agreements Factor into Business Owners’ Estate Plans
- 09-14-22
- Kirsch CPA Group









SALT Cap Workaround Law Could Save Ohio Business Owners Over $100 Million
- 08-31-22
- Kirsch CPA Group
























How Manufacturing Companies Can Benefit from the Section 179 Expensing Deduction
- 08-04-22
- Kirsch CPA Group



























Could the Work Opportunity Tax Credit Help Your Construction Company?
- 06-23-22
- Kirsch CPA Group






Good News: IRS Boosts Standard Mileage Rates for Second Half of 2022
- 06-23-22
- Kirsch CPA Group
























Education Benefits Can Help You Recruit and Retain Smart Employees
- 05-26-22
- Kirsch CPA Group









Ensure Your Construction Accounting System Has the Right Features
- 05-12-22
- Kirsch CPA Group





















John Kirsch Named to Greater Butler and Warren Counties Business Hall of Fame
- 03-25-22
- Diane Glover






Manufacturers Need to Act Soon to Take Advantage of 100% First-year Bonus Depreciation
- 03-17-22
- Kirsch CPA Group



























Commission Fraud: Salespeople Getting Paid More Than They’ve Earned
- 02-04-22
- Kirsch CPA Group
















































Consider a New Approach to Meeting Your Business Real Estate Need
- 09-17-21
- Kirsch CPA Group
























Beware: Teleworking Arrangements May Cause State Tax Withholding Issues
- 08-18-21
- Kirsch CPA Group
























5 Common Construction Accounting Risks — and How to Address Them
- 07-07-21
- Kirsch CPA Group















Supreme Court Finds No Standing to Challenge a Provision of the ACA
- 06-24-21
- Kirsch CPA Group






Labor Shortage: Unlock Solutions by Evaluating Your Employment Value Proposition
- 06-09-21
- Kirsch CPA Group









Material Participation Standard is the Key to Unlocking LLC Tax Losses
- 05-27-21
- Kirsch CPA Group









Know Your Legal Obligations Under the Americans with Disabilities Act
- 05-13-21
- Kirsch CPA Group



























PPP Loan Not Forgiven? There’s a Safe Harbor for Deducting Expenses
- 12-03-20
- Kirsch CPA Group












What You Need to Know About the Deferral of Payroll Tax Obligations
- 09-15-20
- Kirsch CPA Group


















PPP Loan Forgiveness – Significant Borrower Friendly Changes on the Horizon
- 06-04-20
- John Kirsch





















Tax Filing Deadline Remains April 15 – Payment Due Extended to July 15
- 03-19-20
- John Kirsch





































































Prepare to Receive a Social Security Administration No-Match Letter
- 10-15-19
- Kirsch CPA Group





















IRS Announces Changes for Personal Use of Employer-Provided Vehicles
- 06-10-19
- Diane Glover






























Watch Out for these Tax Issues When Planning for Your Business in 2018
- 06-26-18
- Diane Glover









What Image Does Your Organization Present to Large Contributors?
- 03-15-18
- Kirsch CPA Group



8 strategies to help you adapt to economic down turn without layoffs
- 02-24-18
- Diane Glover













































Remember To Take Required Minimum Distributions at Age 70 1/2 Or Face Penalties
- 02-17-17
- Sue Schloemer







































Time is Money: Don’t Spend Valuable Time Inputting Data into QuickBooks
- 06-18-22
- Diane Glover




