BCA Risk Management & Mitigation 2

Question 1

A business appraiser is evaluating a company heavily dependent on a single customer accounting for 65% of revenue. Which risk category best describes this?

Accepted Answer

Customer concentration risk

Answer

Customer concentration risk arises when a significant portion of revenue depends on one or few clients, making the business vulnerable to loss of that relationship.

Question 2

Which mitigation strategy involves spreading business activities across multiple industries or product lines to reduce exposure?

Accepted Answer

Diversification

Answer

Diversification reduces risk by ensuring that a downturn in one area does not devastate the entire business.

Question 3

In a BCA context, 'key person risk' is best mitigated by which of the following?

Accepted Answer

Purchasing key-man life insurance and cross-training staff

Answer

Key-man insurance provides financial protection and cross-training ensures operational continuity if a critical individual departs or dies.

Question 4

When a buyer acquires a business and requires the seller to remain for a transition period, this arrangement primarily mitigates which risk?

Accepted Answer

Key person / management continuity risk

Answer

An earnout or transition agreement keeps critical knowledge and relationships in place, reducing the risk associated with loss of the prior owner.

Question 5

A company operates entirely in one geographic region. From a risk management standpoint, an appraiser would most likely:

Accepted Answer

Apply a geographic concentration premium to the discount rate

Answer

Geographic concentration increases risk exposure to regional economic downturns, natural disasters, and local regulatory changes, warranting a higher discount rate.

(BCA) Business Certified Appraiser Practice Test

(BCA) Business Certified Appraiser Practice Test

BCA Risk Management & Mitigation 2