The cost of capital of a non-listed company (or cost of equity for an SME) is the minimum return rate required by shareholders to invest in a company not traded on an organised financial market. Its estimation is one of the most delicate challenges in SME valuation, as it cannot directly rely on market data available for listed companies.

The most widely used method is the adaptation of the CAPM to non-listed companies: Ke = Rf + β × (Rm - Rf) + SCRP + Size premium. The beta is estimated by unlevering/relevering from a panel of listed comparable companies (sector asset beta). The size premium reflects the additional risk linked to small size (limited capital market access, key person dependency, lower diversification) — typically 2 to 5% for SMEs vs large listed companies.

In Franco-Swiss valuation disputes, the cost of capital for non-listed companies is frequently debated between expert witnesses — a 2 percentage point difference in Ke can generate a 15 to 25% valuation difference on an SME. Documenting and justifying each component with market data is therefore essential for any defensible valuation.

Example: valuation of a Swiss services SME (CHF 6M revenue, CHF 900K EBITDA). Estimated Ke: Rf (10-year Swiss government bond) 0.8% + unlevered β × equity risk premium (4.5%) + size premium 3.5% + SCRP 2.0% = 10.1%. With target capital structure 30% debt / 70% equity, WACC ≈ 8.2%.

At Hectelion, we estimate the cost of capital for non-listed SMEs using documented, defensible methodologies, justifying each component with updated market data.