Adding Value

A student competition tackles a topic that textbooks overlook.
Adding Value
WHAT SHOULD PROFESSORS DO when standard textbooks omit an important area in their discipline? They could follow Herbert Kierulff’s lead—launch a student competition to address that missing piece of the puzzle.

Kierulff, the Snellman Professor of Entrepreneurship and Finance at Seattle Pacific University’s School of Business, Government and Economics in Washington, got the idea after his former student Adam Manson asked him why undergraduate and graduate finance programs largely ignored the valuation of private or very small public companies. Although most finance textbooks spend up to three-quarters of their pages explaining valuation, they do so almost exclusively in regard to large, publicly traded companies and their investments, says Kierulff.

“That leads students to grossly overvalue smaller private for-profit and nonprofit enterprises,” he explains. As an example, he refers to a case regarding a private engineering services company with US$42 million in sales. “Using the textbook approach, students would value the firm at $45.6 million,” he says. “However, professional evaluators who provided this case estimated its value at $7.4 million.”

An understanding of private evaluation is especially important given that private companies make up the vast majority of firms in the U.S. In 2011, for example, the U.S. Census documented 98,914 companies in the country with more than 100 employees; of these, only 5,008 were traded on public exchanges. “Since private organizations require most of the same financial capabilities as publicly traded firms,” says Kierulff, “an obvious educational gap exists.”

Kierulff held the first Private Business Valuation Challenge in 2012 as an exercise for 15 students in his finance course. His students analyzed a financial report for an actual company, a craft brewery. The report was provided by the accounting firm Moss Adams with identifying names and locations removed. Three representatives from Moss Adams judged students’ final presentations.

The challenge remained a classroom project until 2013-2014, when the school invited other universities to take part. In that inaugural event, 146 accounting, entrepreneurship, and finance students from 18 universities competed. The students worked from their home universities from August through mid-January—during that time, they formed teams of three to five students each and created preliminary valuations of the engineering services company mentioned above, using a past year’s report provided by Moss Adams. In January, they were granted access to current data, so that they could update their reports and create 40-minute video presentations, which they submitted to a central website for valuation professionals to judge. Finalists were invited to Seattle to present their valuations in person to a board of professionals. The first-, second-, and third-place winners received prizes of US$5,000, $2,500, and $1,500, respectively.

Manson’s firm, Business Valuation Resources (BVR), co-sponsors the competition with the business school. BVR also provides students free access to proprietary private and public company valuation data.

Designing a competition around a topic about which students have little to no knowledge can be daunting, says Kierulff. “There is a steep learning curve that requires changes in teaching and learning.” Organizers must provide a lot of background material and support for students along the way. For example, Kierulff made his syllabus and course materials accessible online to help students at all participating schools.

Feedback from students, faculty, and the 21 judges who participated in the 2013-2014 competition was so positive that the Private Business Valuation Challenge will become an annual event. For the 2014-2015 competition, 25 teams analyzed data from a road construction company, and the finalists traveled to Seattle in April to make in-person presentations. Many of the students participating in this year’s challenge also had access to local experts in their communities who acted as resources.

“I have been pleasantly surprised at the reception we’ve gotten from the professional valuation community,” Kierulff says. “They’ve embraced what we’re doing and have volunteered time and money to help. That support has meant more than I can say.”

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