Capitalization Rate Explore the Offsets to Apparent Risks

The higher the capitalization rates the lower the value of the business. Don't be fooled, however, by surface risks. Below are a few apparent risks, which might raise the capitalization rate. Then in italics is a mitigating offset which would nullify the risk.

There was a limited, or restricted supply base;

• The company owned the exclusive rights to the product being sold;

There appeared to be an over dependence on a single customer;

• The company had a contract with substantial built-in profit margins;

The demand for the company's product was volatile;

• The company's customer was a large, financially stable company;

There was evidence of high employee turnover;

• Because the production of the company's product was dependent on the customer's demands, the company employed temporary help, which helped the company control costs; 

There appears to be a high ratio of debt to equity.

• The company's debt to equity ratio was the result of large technological expenditures that kept the company in a position of being the only available source of product supplied to its large and financially stable customer.