Why Finance Majors Should Learn to Value Private Companies

Glance through the content of a typical finance text and you’ll find it filled with examples and data about valuing really big public companies.   We teach about valuing the large public companies because—until now—the data and reports on private firms and the small stock premium haven’t been freely available or are too expensive to obtain.   Also, real cases on private companies are rare because of confidentiality concerns.

However, it’s essential to include the valuation of private companies in our curricula.  The vast number of private firms and other private asset combinations and the significant number of specialized financial services needed for them require it.

At the time of the 2008 U.S. Census, there were over 6 million U.S. businesses reporting a payroll.  Over 655,000 had 20 employees or more and almost 39,000 had 500 employees or more.  Only a small portion are public—how many are public appears to depend on the source.  The Wilshire Associates data reported in USA Today (March 17, 2013) indicated that the number had dropped from 4,593 in 2008 to 3,687 in 2012.  In addition, there are approximately 10,000 U. S. over the counter stocks.   

Of the private U. S. companies today, many of them are big—think Cargill and Koch Industries.   Aside from big stand-alone private corporations, financial professionals have plenty of opportunities to value other non-public asset combinations.  In addition to smaller private for-profit corporations, LLP’s, non-profits, joint ventures, spinouts, and company divisions, business units, and product lines come to mind.

Finance graduates will participate in a large number of valuation related tasks over their careers.  Many of these apply primarily to private businesses or other non-public asset combinations:

• ·      Company strategy
• ·      Financing (IPOs, ongoing business requirements, restructuring/recapitalizing, bankruptcy)
• ·      Mergers and acquisitions
• ·      Purchase price allocations
• ·      S to C, C to S corporation conversions
• ·      Buybacks
• ·      Shareholder (buy-sell) transactions
• ·      Exit strategy planning and evaluation
• ·      ESOP planning, implementation, and administration
• ·      Incentive compensation planning and evaluation
• ·      Tax planning
• ·      Economic damages estimates
• ·      Eminent domain issues
• ·      Estate planning and evaluation
• ·      Gift planning

Performing these tasks requires more data, information, and education than is currently available to most students.  However, as I mentioned earlier, the problems at the university level have been the cost and the lack of real cases. 

Those problems have been solved for Seattle Pacific University.  Over the last two years, Business Valuation Resources (BVR) has been providing our students with free access to over $5,000 worth of essential data and information bases for valuing private companies and other assets.  The accounting firm of Moss Adams has provided us with a real private company to use as a case.  

At the outset, we decided to make a competition of it--The BVR/SPU Valuation Challenge. Valuation experts judge student presentations of their valuations and prizes are awarded.  Competition using a real company makes it fun and motivates both faculty and students.  This year, the competition will go national—available to teams from universities and colleges around the country.  For more information, go online to BVR/SPU Valuation Challenge. Making this available to as many colleges and universities as possible is our hope for the future.