Valuation analysts may overestimate the company-specific risk premium when valuing small businesses

Ted Israel (Eckhoff Accountancy Corporation) is one of several valuation practitioners that believe there is strong evidence that the small publicly traded companies that inhabit Ibbotson’s deciles 10y and 10z and Duff & Phelps’s portfolio 25 are plagued with many of the same conditions generally associated with small private companies.  In his article “Risky Business: The Generous Helping of Company-Specific Risk That May Already Be Included in Your Size Premium,” published in the upcoming June issue of BVUpdate, Israel writes:

If the analyst is valuing a small company and the estimated cost of capital includes a size risk premium ….then the incremental premium to address the unsystematic risk posed by the company is very small, if not unnecessary. The reason for this conclusion is the makeup of the companies that compose the smallest deciles or portfolios of size compiled by these data providers: i.e., risky companies.
Download the complete article: Because of the growing interest in this subject, we’ve added Israel’s article to our free downloads page at BVResources.

Israel and Jim Harrington (Duff & Phelps) are going to speak on the subject at the CalCPA BV Conference on June 3rd in San Francisco. Also speaking are Warren Miller (Beckmill Research) and Robert Slee (Robertson & Foley).