Your business is likely your largest asset so it's normal to want to know what it is worth. The problem is: business valuation is what one might call a "subjective science." The science part is what people go to school to learn: you can get an MBA or a degree in finance, or you can learn the theory behind business valuation and earn professional credentials as a business valuation professional.

The subjective part is that every buyer's circumstances are different, and therefore two buyers could see the same set of company financials and offer vastly different amounts to buy the business and that's because of the differing levels of risk.

The valuation expert must identify these drivers of risk / value and judge their magnitude in order to estimate the additional rate of return the market would require offsetting the investor’s acceptance of additional risk. The factors will vary from company to company, among industries, and over time within the same company. These may include depth of management, importance of key personnel, stability of industry, product diversity or service, geographic location, earnings margins, etc. and they can be grouped into 3 main broad categories.

Financial risk relates to profitability, this is one of the most important measures of the company’s value, because it usually links directly to the main objective of the company itself.  the money coming in via accounts receivable and going out via accounts payable – is the lifeblood of your business.  

Companies typically produce revenue through the sale of products or services to consumers and generate expenses by paying their employees and producing their products or services. Learning about various strategies for increasing profitability can help you implement key ratios within your teams to increase revenue and decrease expenses. Thereby reducing the overall risk to investors, improving returns to the company and adding value to the business.

Operational risk relates to all the business practices that you employ as a business owner/manager designed to run your business. Items which impact sales, cost of sales, or administrative and operating expenses, are a component of the business risk. Companies of all sizes should prioritize their business operations systems to define and track the procedures and resources that help them succeed. These systems help contribute to a company's overall value. Learning more about how your business operates will highlight areas of risk relating to, for example, management quality & structure, policy & procedures, point of sale/workflow/inventory control software. The lower the operational risk will make the investment more attractive and ultimately, more valuable.

External Risk or market risks are factors that arise from sources outside the organization, and they cannot be controlled by internal management or company systems. Unlike internal risks, external risks are difficult to predict and often difficult to plan for with any high level of reliability. Examples of external risks are economic stability, competition, accreditations, Government regulation and environment considerations etc. Therefore, the lower the level of external control or reliability, such as regulation or accreditation, means less uncertainty. This leads to better planning and certainty for the investor to obtain a return on their investment, whilst creating another level of value compared to an investment with high external uncertainty.