Economic Volatility Requires a Higher Level of Consideration Regarding Industry Risk

While the national and global economies remain unstable, business owners need to thoroughly evaluate where they fit in their industry in terms of risk factors when determining the value of their company. Industry risks could have either a positive or negative effect on value based on an analysis of the company’s industry risk.

Because industry risk is considered systematic, a specific industry may be more or less risky in comparison to the entire market. A higher level of industry risk indicates a higher level of uncertainty, resulting in greater instability. This may also result in a lower overall value for the business. Changes in long-term characteristics of an overall industry are not expected to change significantly between years.

When evaluating industry risk, companies should analyze qualitative factors including the stage of the overall industry’s life cycle, the shape of competition for the industry (i.e., buyers, suppliers, substitutes and competitors), consideration of interdependent industries and cross market segments, and industry forecasts and growth projections. Stability of industry risk in the past provides little indication of future stability. Industries comprising relatively few companies tend to exhibit more instability regarding industry risk. It is important to compare companies with similar business models and relative industry position to determine positive and negative influences.

For more information, please contact Schneider Downs Business Advisors' Joel Rosenthal at 412.697.5387 or Tom Claassen at 412.697.5330.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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