Why Industry Risk Can Make or Break Your Business Valuation

When it comes to valuing a business, not all industries are treated equally. Even two companies with similar revenue and profit levels can receive very different valuation multiples based solely on how risky their industry is perceived to be.

Understanding industry risk isn’t just important—it’s essential. Whether you're preparing to sell, attract investors, or secure financing, your valuation multiple (i.e., how much your company is worth relative to its earnings or revenue) will be significantly impacted by your industry’s risk profile.

Step-by-Step: How Industry Risk Affects Your Valuation Multiple

1. Understand What a Valuation Multiple Is

• A valuation multiple is a number applied to your earnings, revenue, or other metrics to determine the overall value of your business.

• For example: If your company earns $500,000 annually and your industry multiple is 4x, your estimated value = $2 million.

2. Learn How Industry Risk Lowers or Raises That Multiple

• High-risk industries (e.g., restaurants, construction) tend to get lower multiples—often 1.5x to 3x EBITDA.

• Low-risk or stable industries (e.g., SaaS, healthcare, essential services) can command higher multiples—sometimes 5x to 10x or more.

Source: IBISWorld provides industry-level risk ratings and benchmarks commonly used by valuation professionals.

3. Review Your Industry’s Risk Profile

• Use industry research tools like IBISWorld, RMA, or First Research to understand:

  
  

  • Revenue volatility

  • Regulation risk

  • Competitive pressure

  • Market trends and cyclicality

Example: A landscaping company might face seasonal demand and local competition, reducing its multiple. In contrast, a B2B software firm with recurring revenue might attract a much higher multiple due to its stability and scalability.

4. Benchmark Against Similar Companies

• Look at comparable transactions using databases such as:

  
  

  • DealStats

  • BizComps

  • PitchBook

  
  

• These show what similar businesses have sold for in your industry, giving a realistic view of market-based multiples.

5. Improve Your Position Within the Industry

Even if your industry is high-risk, you can still improve your individual company’s risk profile by:

• Diversifying your client base

• Creating recurring revenue streams

• Investing in strong financial controls

• Building out leadership teams and reducing key-person dependency

Real-World Example

A local HVAC company earning $1M EBITDA might typically receive a 3x multiple ($3M valuation). However, if that business has long-term maintenance contracts, low customer concentration, and a scalable process, it could command a 4x or higher multiple—despite operating in a traditionally lower-multiple industry.

Common Mistakes to Avoid

• Assuming your business is worth the same as a tech startup. Industry matters—a lot.

• Using rules of thumb without context. Multiples vary by region, size, and market conditions.

• Ignoring industry benchmarking reports. Lenders and buyers won't make the same mistake.

Summary of Best Practices

✅ Know your industry’s typical risk profile

✅ Use data-driven benchmarks (not just gut feeling)

✅ Strengthen your business model to reduce perceived risk

✅ Get a professional valuation to understand your true multiple