Conclusion

The risk assessment has a material impact on the valuation of a SME as it influences the

quantum of the discount rates and multiples used. The key components of any valuation of a

SME comprise the SME’s financials and these rates and multiples which include:

• The Return on Investment rate

• The Discount rate

• The Goodwill multiple

• The Owners discretionary income multiple

• The Payback period multiple

• The Investment internal rate of return

The Risk Assessment of a SME

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Introduction

There are many factors that can be considered in a risk assessment but more emphasis

is placed on those that could have a material impact on the future success of the SME .

Material Risk Factors

Typical high risk issues or opportunities include:

• A over reliance on a few key suppliers or customers or staff members

• High exposure to foreign exchange risk

• Operating in a rapidly evolving high tech industry

• The business is vulnerable to artificial technology advancement in the short to medium

term

• Exclusivity of the supply chain (i.e. patents, exclusive contracts with manufacturer, supplier

of goods or service providers)

• Exclusive long term sales contracts with customers

• Subject to high risk or advantageous regulated market conditions (e.g. BEE, mining etc.)

• Exposure to new market trends such as the growing online retail market

• The security of tenure relating to the SME’s location of the business if that is a key strength

• Any dependency on specific scarce skills and experience

• The strength of the brand and the reason for its underlying strength (e.g.is it linked to the

previous owner or is it linked to products and service levels provided by the company)

• Competition and the SME’s ability to keep pace with competitor / market changes

• Exposure to changing trends (e.g. climate change, fashion, consumer buying patterns,

changing business conditions etc.)

• Dependency on specific markets (e.g. foreign versus local, luxury goods or services versus

basic everyday needs etc.)

Other Factors

Certain issues will also affect the confidence that one will place on the SME’s future success.

These include the time that it has been in business, the quality and experience of its work

force, its financial performance over an extended period, the quality of its financial and

operational systems, the complexity of the business, etc.

Impact of low risk assessment

A lower risk profile will attract a lower

targeted rate of return or discount

rate and higher multiples resulting in

a higher price for the business. This will

be covered further when the various

valuation techniques are discussed.

Impact of high risk assessment

A SME which is deemed to have

a higher risk profile than other

companies in the same sector will

attract a higher targeted rate of return

or discount rate and lower multiples

which will lower the value of the

business.