How to value a company in a high-risk industry before putting it up for sale

A company may generate stable profits but receive a valuation far below the owner’s expectations. In a high-risk industry, value depends not only on revenue and EBITDA but also on licence stability, banking access, the quality of compliance controls, and potential regulatory claims. One unresolved AML issue or dependence on a single payment provider may affect the valuation multiple more than sales growth. If these risks emerge only during buyer due diligence, they will almost certainly become grounds for reducing the price. In this article, we explain how to value a company in a high-risk sector, which adjustments are required, and what can be improved before the sale begins.

What makes a company high-risk

There is no single universal definition of a high-risk industry. The term generally covers sectors facing enhanced regulatory oversight, limited banking access, greater fraud or AML exposure, and significant reputational risks. These may include crypto, online gambling, payments, cannabis, defence, adult services, and certain financial services.

During valuation, a buyer assesses both the industry and the company’s specific risk profile. Key value factors include:

• The need to obtain and regularly renew licences;
• The risk of regulatory investigations, fines, or restrictions;
• Dependence on banks, acquirers, and payment processors;
• High chargeback, fraud, or AML/CFT exposure;
• Restrictions on marketing, geography, and customer onboarding;
• Potential liability for past violations.

Under the FATF approach, risk should be assessed by its nature, scale, and the quality of mitigation measures. Two companies in the same industry may therefore have very different values. A business with a transparent ownership structure, stable banking relationships, and effective compliance controls will usually receive a higher valuation than a similarly profitable competitor with unresolved regulatory issues.

High-risk status does not make a company impossible to sell or value objectively. It requires separating industry risks that a buyer cannot remove from company-specific weaknesses the owner can address before going to market.

Choosing the right valuation method

IFRS 13 identifies three main valuation approaches: market, income, and cost. When selling a company, the method should reflect its business model, financial data quality, and available information on comparable transactions. For a high-risk business, using several methods and explaining differences between the results is more reliable.

Market approach

The market approach values a company using valuation multiples from comparable public companies or completed M&A transactions. Common metrics include EV/EBITDA, EV/revenue, and price-to-earnings.

The main challenge is finding truly comparable businesses. Differences in licences, geography, customer mix, regulatory record, and banking access require multiple adjustments. Applying the multiple of a large regulated group to a small business with unstable processing will almost certainly overstate its value.

Income approach

The income approach estimates future cash flows and discounts them to present value. DCF can separately reflect expected growth, compliance costs, capital requirements, and adverse scenarios.

The forecast should consider both the management plan and realistic constraints. Loss of a licence, market closure, or termination of a banking relationship may be reflected through scenario analysis or a risk-adjusted discount rate. The same risk should not be fully included in both cash flow and a higher discount rate, as this would reduce value twice.

Cost approach 

The asset-based approach calculates value through the company’s assets and liabilities. It is particularly useful for capital-intensive, distressed, or pre-revenue businesses and companies whose value lies in licences, technology, reserves, or proprietary systems.

Book value rarely equals market value. Intangible assets, contingent liabilities, and compliance remediation costs require separate assessment. The valuation should also distinguish enterprise value from equity value by deducting debt and adding excess cash. This shows the owner the expected share value, not only the business value before financing.

Normalising revenue, EBITDA and cash flow

Financial statements show historical results, but a buyer focuses on profits that will remain after the ownership change. Before valuation, the figures must be normalised to separate sustainable performance from one-off, personal, or unsupported transactions.

Key adjustments include:

• Excluding one-off income unrelated to normal operations;
• Adding back documented one-off costs that will not recur;
• Adjusting owner and related-party compensation to market levels;
• Correcting related-party transactions made on non-arm’s-length terms;
• Excluding revenue from discontinued, unlicensed, or unsupported products;
• Including mandatory compliance, audit, insurance, and licence renewal costs;
• Adjusting losses from chargebacks, fraud, refunds, and withheld reserves.

Add-backs must be justified. A seller cannot increase EBITDA by excluding recurring compliance costs or expenses required to operate a regulated business. The buyer will also review bank statements, tax returns, merchant account reports, and management accounts. Inconsistencies between these sources will reduce confidence in the valuation.

Revenue concentration requires separate analysis. High profits are less sustainable if most revenue comes from one client, market, affiliate channel, or payment provider. The company should calculate both normalised EBITDA and cash conversion: how much profit becomes available cash after reserves, working capital, taxes, and mandatory capital requirements.

The result should be a clear bridge from reported to normalised EBITDA. Each adjustment needs an amount, explanation, and supporting document. This allows the valuation multiple to be discussed using verifiable earnings rather than forecasts the buyer may reduce during due diligence.

How risk affects the final valuation

Risk should be reflected consistently and measurably. Simply calling an industry high-risk does not justify a discount. The buyer needs to see which events may affect cash flow, how likely they are, and which controls reduce their impact.

Discount rate and valuation multiple

In a DCF, greater uncertainty normally increases the discount rate and reduces the present value of future cash flows. Under the market approach, the same effect appears through a lower valuation multiple compared with stable, fully regulated peers.

The adjustment may reflect unstable banking access, a short operating history, licence dependence, customer concentration, and higher compliance costs. However, the risk premium must be justified. An arbitrary increase in the discount rate makes the valuation difficult to defend.

Scenario analysis

Risks with specific consequences are better reflected through several scenarios. The base case may assume continued operations, the downside case may cover market loss or higher compliance costs, and the severe case may involve suspension of a licence or payment processing. Each scenario receives a justified probability.

This approach is particularly useful when the company’s future depends on pending regulation, licence renewal, or a regulator’s decision. It shows the effect on value more clearly than one general discount.

Deal structure

A buyer may keep the headline price but shift part of the value into an earn-out, escrow, holdback, or deferred consideration. Payment may then depend on retaining the licence, meeting revenue targets, or avoiding regulatory claims after closing.

These mechanisms allocate risk between the parties but reduce the amount paid to the seller immediately. Valuation discussions should compare not only the stated price but also cash at closing, later payment conditions, and potential indemnity obligations. The same risk should not be fully included in forecasts, the discount rate, and a price holdback, as this would reduce the seller’s value three times.

Licences, intangible assets and hidden liabilities

In a high-risk company, much of the value often comes from the right to conduct regulated activities, technology, and established infrastructure rather than tangible assets. However, a buyer will pay for them only after confirming enforceability, ownership, and continued use after closing.

Assets that can increase value

A valid licence may shorten market entry and attract more potential buyers. Its value depends on its term, geographic scope, permitted services, and the company’s regulatory history. The seller should check whether the licence permits a change of control, requires regulatory approval, and remains valid after changes in management or beneficial ownership.

Value may also come from proprietary software, trademarks, domain names, customer relationships, compliance systems, and agreements with banks or payment providers. The seller must prove IP ownership, lawful use of customer data, and transferability of key contracts. If the founder personally owns the software or a processor may terminate its agreement after the sale, the value of these assets decreases.

Liabilities that reduce the price

Unrecorded liabilities may reduce equity value or lead to escrow and specific warranties. Before the sale, the company should identify:

• Pending or likely regulatory investigations;
• Unpaid taxes, penalties, and licence fees;
• AML/KYC gaps and incomplete customer files;
• Chargeback exposure, refunds, and processor reserves;
• Disputes with customers, employees, and counterparties;
• Liabilities arising from data breaches and cybersecurity incidents;
• Sanctions or source-of-funds restrictions;
• Mandatory remediation costs after closing.

A contingent liability may not appear on the balance sheet, but the buyer will still include it in the valuation. If the amount can be estimated, it may be deducted from value or included in a downside scenario. If it is unknown, the buyer will usually require an indemnity, holdback, or withdrawal right.

An advance review allows the seller to disclose an issue together with a remediation plan. A risk identified and measured before due diligence usually affects the price less than a violation discovered independently by the buyer.

How to increase company value before the sale

Preparation should begin several months before approaching buyers. The goal is to remove factors that reduce transferable earnings, increase the discount, or allow the buyer to retain part of the price.

Before going to market, the company should:

1. Resolve compliance gaps. Complete overdue filings, update AML/KYC procedures, confirm compliance with licence conditions, and document remediation of unresolved issues.
2. Reduce founder dependence. Transfer key functions to the management team, formalise authority, and avoid leaving licences, banking, or sales under the owner’s sole control.
3. Diversify critical relationships. Reduce dependence on one customer, bank, payment processor, supplier, or marketing channel.
4. Review material contracts. Check their terms, termination rights, change-of-control clauses, and any consent required for the transaction.
5. Confirm IP ownership. Secure the company’s rights to software, trademarks, domains, databases, and work created by employees and contractors.
6. Prepare a consistent data room. Collect financial statements, tax returns, licences, corporate records, material contracts, policies, and regulatory correspondence without inconsistencies.
7. Conduct seller due diligence. Review financial quality, ownership, tax, compliance, litigation, and cybersecurity before the buyer identifies these issues.

This preparation gives the owner a justified valuation range and a list of remaining risks. Corrected weaknesses strengthen the business, while risks that cannot be removed can be measured and reflected in the price or deal structure. This reduces the likelihood of the buyer significantly revising its offer after due diligence.

How Key2Law helps prepare a high-risk company for sale

Key2Law team advises owners of regulated and high-risk businesses preparing for a sale. We combine financial valuation with an assessment of licences, corporate structure, compliance controls, and transaction risks so the stated value can withstand buyer due diligence.

When preparing a company for a transaction, Key2Law can:

• Select a suitable valuation approach and realistic price range;
• Review licences, change-of-control requirements, and regulatory approvals;
• Conduct corporate, compliance, and operational risk assessments;
• Analyse banking, processing, and material contracts;
• Identify liabilities that may reduce equity value;
• Prepare a remediation plan and structured data room;
• Verify ownership of IP and other intangible assets;
• Support due diligence and price adjustment negotiations.

If you plan to sell a company in a high-risk industry, contact Key2Law before taking the business to market. We will help identify value drivers, resolve critical weaknesses, and prepare the company for negotiations without unexpected discounts during buyer due diligence.

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This material is for informational purposes only and does not constitute legal, tax or investment advice. Licensing, capital and conduct requirements depend on the jurisdiction, financial instruments and the broker’s actual activities. Obtain advice tailored to your business before adopting or changing an execution model.