Before adjustments can be made, a benchmark level of risk must be established against which specific company risks can be measured. If comparable publicly traded companies are identified, a peer group can be formed for risk comparison. In either case, once the benchmark level of risk is known, an appraiser can weigh the particular risks of the company against the benchmark. The mistake often made is to stop here. Applying a specific company risk premium in the capitalization rate implies that the subject company is riskier than the hypothetical typical micro-cap company.
Many factors form the parameters of a subject company's degree of risk.
Investments in smaller entities are typically more speculative in nature. The Ibbotson data is a treatise on how investments in small companies typically carry a greater expected rate of return. Small size tends to be accompanied by many of the risks listed below. Access to Capital Markets. Publicly traded entities and larger companies generally have greater access to avenues of raising money than small, closely held firms.