I think the 2010 CFA material has an entire reading dedicated to private company valuation.
Alright guys, I can agree that some level of critical thinking is required in valuations because it can be so subjective. Subjectivity requires use of judgement and supported reasoning. It’s not always a “high degree” of critical thinking but certainly some is required.
Calculating the WACC (including company specific risk premium) and selecting comps for a niche private company can be highly subjective. In the absence of open market transaction data, it can be even more subjective. Subjectivity by its very nature requires questioning assumptions to arrive at well reasoned and supported conclusions.
In response to a question, no I do not work in valuations. I have worked in a Big Four for 6 years, primarily in Corporate Finance. So do have significant exposure to valuations. CF valuation work is quick and dirty compared to the granular level of detail that formal valuation reports go into (though we are often very close in our ranges of value - which calls into question the time spend getting into the granular detail).
I do see our Val group’s reports (for business valuations) so I do know what goes into them and have completed a few myself. I have not had exposure to goodwill impairment testing, PPAs, etc. - and I wouldn’t want to!
IMO and correct me if I’m wrong, the more complex areas of valuation these days (in terms of technical material) are learning the new accounting / financial instrument standards (or in some countries, conversion to IFRS) and how they impact goodwill impairment testing, purchase price allocations, etc.
> ^I agree with higgmond and Mobius Striptease.
> Private company valuation work is often complex
> because you are not dealing with a set of
> financial statements that has been audited for SEC
> purposes. Many times, the adjustments are far
> more complex than the traditional public company
> adjustments. In addition, many private companies
> are niche companies where it is difficult to come
> up with suitable guideline public companies so
> valuation is tricky and requires a high degree of
> critical thinking skills.
With respect to designations, the vast majority of prominant valuations professionals in Canada hold the CBV designation. I can’t speak for the U.S. and whether ASA holds the same weight. I have never seen a valuations partner in a Big Four in Canada without a CBV designation.
CFA is well respected in virtually any finance field. It’s really a designation that you can’t go wrong with in terms of building credibility. Agree with the poster that is does have some aspects applicable to valuations including DCF, beta, comps, WACC, etc. You could pick this stuff up pretty quickly with a little reading through.
You all have made some good points regarding the field of valuation.
First and foremost, while very well respected, the CFA is overkill by about 6 to 8 fold. If you are working in valuation, and doing the CFA, it’s only because you are trying to get out of valuation and into research, PE, investment management etc. If you are not working in valuation, you are not doing the CFA to get into valuation.
As stated, depending on the type of firm, different designations in valuation are preferred. Many regional accounting firms like CPA/ABV combinations, and for litigation support work, generally the CPA and ASA are desired. Large valuation companies look for ASA or CFA.
Valuation, in a nutshell, isn’t very stimulating work. There are two main areas of valuation -
Financial reporting and Tax planning.
yes, i know there are other areas including fairness opinion and litigation (including economic damages, divorce, property tax and condemnation), but for the most part its one of the two.
Financial Reporting: If you work in financial reporting, you will be doing mostly FAS141R and IFRS3 purchase price allocations. A purchase price allocation, while it seems financial in nature, is really more of some bizarre accounting exercise. I will explain what you will be spending most of your time doing, and then you tell me if you think you need the CFA to spend your life doing this.
Step one, for no reason but because the auditors will ask, you determine the IRR of the deal. The only thing this does is justify the purchase price and your discount rate calculation. Brain power used for step 1 on a scale of 1-10, with 1 being tying your shoes, and 10 being performing surgery while attempting to land on Jupiter: 0.5. yes, tying your shoes is more difficult cuz sometimes you make the knots too big or small.
Step two - value everything they acquired (assets and liabilites) - equipment, real estate, securities, intangible assets and liabilites.
Intangible assets is where most of your time is spent, valuing things like customer relationships, research and development, contracts, tradenames..
You build up a WACC with a couple commonly accepted approaches of either the CAPM or starting with a RFR and adding a bunch of premiums from a big silly book to it.
If you work for a big4 type firm and there are complex securities or derviatives included in the transaction, there is a separate group of MSF and MFE types who just do that, so you can’t even have a lil fun.
Make a bunch of tables and a report which then is reviewed by the audit firm.
FAS142 Goodwill impairments - Basically if a firm has goodwill on their balance sheet you value the company yearly to test if its BEV has gone down. If it has, you revalue the balance sheet to see if there is an impairment in the goodwill.
That is most of your work, sure some firms spend more time doing some derivatives accounting, but this is most of the finanical reporting work you will do. Oh, and if you work for big 4, you will spend a good amount of time just reviewing other people’s purchase price allocations.
Tax Planning - Most tax planning work involves valuing private companies and then applying a discount for lack of marketability on the share value. you use either an income approach or a guideline public company which is looking at multiples of similar public companies.
So thats valuation. And if you work at a big 4 type of place, you are fortunate enough to use your CFA to work in a 40 story building full of accountants and hope at the end of the year you get your 10% bonus.
I actually recently spoke to a big 4 val guy who while looking at the CFA on my resume said he would rather someone have an ASA than a CFA because anyone can cram for a test a few times. I couldnt help but laugh my ass off.
So I guess I went off topic, as to what you should get for valuation, but I feel I have contriubted to the greater good by shedding some light on the age old question, “why business valuation?”.
I would say that if you are an accountant and you would rather do valuation, stick with your CPA. I think if you are doing the CFA program and find it interesting and challenging, you will quickly say, I hope I can pass this and gain alot of knowledge and get the F out of valuation ASAP.
Happy Thanksgiving all, and feel free to send me an e-mail.
What’s your email?
Mobius Striptease Wrote:
> bhill020 Wrote:
> > fairly inapplicable to private co valuation.
> totally false. there is a good portion of material
> in CFAI textbooks dedicated to the valuation of
> illiquid investments. relative company valuation
> and selection of multiples from guideline public
> companies, levering/unlevering betas from a pool
> of guideline companies, illiquidity discounts,
> valuation of early stage companies.
…………..which is utter rubbish material btw.
I think many people here overestimate the CFA and underestimate accounting.
- Fran: You know, in Tibet, if they want something, do you know what they do? They give something away.
- Bernard: They do, do they? That must be why they're such a dominant global power.
The new fair value paradigm IS finance, not accounting. As IFRS becomes the standard, the CFA grows in stature and application. In 10 years certain aspects of accounting (like those referenced earlier 141R, 142) will require a CFA, not a CPA.
diesel has some good insight, the “traditional” old-school valuation for financial reporting is almost all 141/142, which has a little bit of finance and a lot of (sometimes bizzare) accounting rules you are forced to follow. nearly all small valuation shops do that, in addition to some fairness opinions which the big 4 don’t touch.
the interesting valuation work is done in some offices mostly in the larger firms, so you need to be the lucky right person to get there, if that’s what you want to do. A lot of 157, marking to market portfolios of PE firms that hold various illiquid exotics for which models need to be build. A lot of 133, bifurcation and valuation of embedded derivatives in hybrids. Some 123/409a - cheap stock valuation for venture capital firms that have complex capital structures consisting of common and convertible preferred, warrants, etc. As fair value accounting is becoming more standard, there is a trend in increasing demand for more advanced valuation skills, but for now it is mostly exception to the rule than the norm.
I agree with what mobius is saying. Mobius - I’m a CFA/ASA at a boutique. I have to say though, valuation of intangible assets is an interesting and evolving area. With 70% of businesses today either technology or service oriented, those assets will continue to receive attention, don’t you think?
yes, especially now that 141R is in place, there will be increased complexity around the valuation of contingent considerations. plus, financial instruments are seen more and more as either part of the purchase price consideration, or the assets that are exchanged, so that adds to the mix
I don’t think the CFA Program is overkill for BV professionals. If you read the Business Valuation Review published by the American Society of Appraisers you will see many of the thought leaders in the profession have their CFA Charter. BV has a heavy emphasis on finance theory which I believe makes the CFA Program all the more relevant.
I also think your summary is an over simplification of the purchase price allocation process. For instance developing an attrition rate for customer relationships can be pretty complex. I agree that a purchase price allocation isn’t brain surgery but neither is equity research or private equity. If your idea of real finance is financial engineering or risk management then I would say the CFA Program doesn’t come close to preparing you to be a professional in that field.
> What’s your email?
Mobius - EY is trying to get into fairness opinions
manny - yes, I was oversimplifying the PPA process of course.
As far as attrition rates, it doesn’t matter how complicated the process is, it’s not like it matters anyway. Either you put the value as a customer relationship or goodwill, how does it change anything? The fact is all of the analysis you do is theorectical in nature. its not like you are analyzing a potential acquisition or investment where accurate analysis is the key to millions of dollars of profit. you arent analyzing a company’s fundamental drivers of cash flow to forecast that company’s future performance.
Sure, during the audit review the valuation group will try to generate revenue and give a list of questions encompassing valuation theory and your methodology and assumptions, but for the most part you aren’t doing anything. you arent creating any kind of value, or helping investors make well informed decisions.
So yeah, I do a cute lil exponential decay model and the client thinks I am doing some kind of complicated analysis, and the auditors usually will have no problem with it, because are we really going to sit there and argue predictions for the future?
same goes for contingent liabilities, earnouts, etc. While I agree with them being added for 141R as they should be on the balance sheet, usually everyone just kinda comes to terms with probabliities and estimated payouts.
manny, i respectfully disagree regarding the CFA program. the ASA program is sufficient for anyone engaging in bval (with the exception of portfolio valuation and complex securities and derivatives). But the ultimate goal of the CFA program is the investment management industry, and most of bval is accounting, although as someone mentioned, it really kinda is shifting into more finance..
I tried to edit my last post, but it wouldn’t let me. Manny I do agree that many people in BV have their charter or are pursuing it, and I also agree that ER and PE aren’t rocket science either.
One other thing I feel with BV getting to be such a large field and growing with the complexity of fair value accounting, that the services are becoming even more commodotized and fees are going down because of competition, and so revenues of BV firms and salaries will not be able to grow.
My point was that the CFA Program is not overkill for BV professionals. Sure, an ASA is useful for those working in this profession. I know people in BV who have done well without any designations. I also know people in equity research and private equity with no designations. The point is that BV is financial analysis and therefore the CFA Program is directly applicable.
I disagree with your statement that BV is mostly accounting. While the BV work product may be used for accounting, the analysis is almost entirely finance.
Your other point seems to be that there is no purpose to BV and it means nothing. You’re entitled to this opinion, but at least give us BV people credit for trying to understand the fundamentals behind the client’s projections. To do this we generally need to ask intelligent questions and have some understanding of the value drivers behind the business.
I’m also curious about what you think of private equity who I assume you believe are doing important work because they are making real investments. From what I’ve seen, private equity has taken good companies and led them straight into bankruptcy.
You point on BV becoming more of a commodity is valid, but on the other hand there is better job security than in other areas of finance.
The term “us BV people” includes myself, so I am not trying to attack you by any means. I do agree that BV is financial in nature, but the outcome of most BV work is for accounting purposes.
The CFA is def relevant for BV of course. I just feel that after completing the CFA one may want to do something more (else) with their career and not just use their charter to make them a better BV practitioner. This is just my personal feeling, and I know many people want to do exactly that.
As far as the designations, I agree, people do just fine without them in BV, and PE and ER. I feel like valuation is a different animal than other fields, because PE, ER, IM are all results driven fields, where valuation is more about the credentials. Do you ever notice how people in valuation are always listing all their designations after their names, and it kinda looks silly? I mean you just see some ridiculous designations people list with their names, where in many other fields designations many not be always listed after their names. For instance, many lawyers won’t have Esq after their names in their e-mail sigs but valuation people on website blurbs, email sigs will say like - Maurice Jones-Drew, ASA, MRICS, CPA/ABV, AVA, CDP, CFE, MAI
I am not trying to put PE, ER or any other field on a pedestal, because you are right, many times they aren’t doing much good for things…
No, I am not trying to say the whole field of BV means nothing, because the work is def. necessary, and I understand that there is alot of academic and theoretical standards that must be applied when doing a project. It’s just sometimes I feel I didnt do the CFA program so I can apply a royalty rate to an income stream and perform an excess earnings model and come up with a seemingly arbitrary value for an intangible asset on the balance sheet which isn’t really going to affect the way one looks at a company.
There def is job security in the industry and I remember when the market took a downturn on 02, all the investment bankers who lost their jobs were going to take the ASA classes. Now with the emphasis on FV reporting there are alot of jobs in the valuation industry (and Cramer’s 8 minute segment on Duff and valuation), but I know at my shop PPA fees are getting aggressively negotiated by clients who have several competing bids for work that is just a commodity for them that they just want the lowest bid so they can not think about it and worry about running and financing their company, and investing in new ventures.
the last paragraph makes a very good point, the pricing pressures in the BV industry are enormous and the fees are pushed down to a ridiculous level. that’s a function of 2 things - company management don’t see much value added by engaging valuation firms, it’s viewed as a nuisance that is part of the financial reporting compliance. second, there’s a huge amount of low-cost crappy service providers, yet their work still gets through the audit process. the valuation community is saturated with cheap providers with questionable skills and low-quality work products, which is one more reason why the CFA needs to be a standard, because as we know ASA is a joke designation.
Mobius and Diesel makes some good points.
I agree wholeheartedly that the business valuation field is all about the credentials and not about the results. There are so many “rubbish” credentials that business valuation professionals acquire in order to have the letters after their name because that is what the industry values. I think the field is credentials driven because valuation conclusions and results are so subjective. Two analysts could look at the same company and come up with two different value conclusions - both with excellent arguments and analysis. Both could be right, but there is no way of knowing.
There seems to be more CFA, ASA’s in the field now. Personally, I agree with Diesel that nobody takes the CFA to get into valuation. However, I think the CFA is applicable to the business valuation profession and will become more standard as the field grows. Most of the older business valuation professionals are CPA’s, but I think the newer breed of analysts are flocking to the CFA. I do not think that all analysts who take the CFA while working in the business valuation profession want to move on to investment analysis or IB. Sure, some do, but I think the CFA as a credential can distinguish you from other business valuation professionals. After all, it is a credentials based profession and the CFA is the most respected, rigorous credential that an analyst can obtain.
Good discussion. I have enjoyed this thread.
I am new here and don’t know much about these two. As my opinion CPA is more preferable by the professional firms.
If the ‘business valuation company’ would “rather hire people w/accounting degrees and really value the CPA over the CFA,” you are talking either to (a) CPAs or (b) idiots.
Here’s the problem: Valuation is prospective (i.e., forward-looking). Accounting looks backwards, and most of the CPAs I know do, too. Finance looks forwards.
I hold both designations–plus the ASA. There is no comparison between the CPA exam and the CFA exam: the CPA tests are a walk in the park–you have to know a little about a lot. With the CFA tests, you have to know a lot about a lot.
I know CPAs who couldn’t pass even Level 1 of the CFA regimen…and that test reportedly heavily focuses on financial statement analysis (FSA). That’s because most CPAs think ‘financial analysis’ = ‘ratio analysis.’ That’s like equating “boxing” with “putting on boxing gloves”; there’s a whole lot more to FSA than that. Most CPAs have never seen FSA the way the CFA Institute does it. And the Institute gets it right.
CPAs tend to be fine people, but with limited utility: tax and audit…both of which look backwards.
- Warren Miller, CFA, ASA, CPA
Beckmill Research, LLC
“ASA is a joke designation,” you say? Would you mind elaborating on that, please?
I don’t speak for Mobius, but let me give you my .02.
I have taken one of the four required ASA classes and taken the exam. We sat through three days of relatively easy instruction, and on the last day the instructor basically told us what would be on the exam. On test day, I finished the three hour test in one hour.
If this is representative of the other three ASA classes, then I would say that the education portion of the exam is a joke.
Oh yeah. I almost forgot. There’s also the “online ethics exam”.
82 > 87
Mostly people prefer CFA over CPA But, it depends on the particular case and the choice of the valuator.
Mostly people prefer CFA over CPA But, it depends on the particular case and the choice of the valuator.
This is because the typical undergrad curriculum and the CPA exam contains approximately zero valuation.
Can someone shed light on how the CFA would be useful in Corporate Federal Tax (and by extension International Tax advisory)? I’ve passed Level 2 before the Great Recession, and defaulted into accounting during the recession, got my CPA license, and now thinking about wrapping up CFA L3 if there is value in it. Right now I’m in industry doing Fed&International tax compliance, but I rather be doing tax advisory with or without CFA credential.
I’ve done some brief research on mid-size CPA firms that do tax valuations (they want CFA charterholders), but I cannot connect the dots (i.e. linking a CFA credential to International Tax advisory).
This is one of the best threads I’ve read on AF, particularly the comments by diesel. Having worked some in valuation for the last seven years, I concur with much of what he says– CFA is overkill for valuation, and ASA/ABV type valuation certs are just “cookbook-type” designations. The only part of CFA that applies to Bval is Vol 4 Equity, and it only touches on valuation methods done in practice, such as adjustments to the I/S and B/S to normalize the financials (NonOp and NRE, Comp adjustments), and deriving cost of captital and DLOM from data sources.
In practice valution is really simple– 1) normalize financials 2) determine cost of capital 3) do DCF or Market method 4) apply DLOM. There are data sources for r/wacc and DLOM– the two areas are the most controversial and challenged in court. You don’t need a CFA, or CPA, to do this, just a general understanding of DCF and Market method as taught by ASA, and some accounting knowledge is sufficient. Other than just being a good analyst, the only area where CFA might have a leg up is appying OPM to do cheap-stock valutions for pre-IPO firms. But just passing the CFA exam doesn’t mean that person would be able to set up an OPM with breakpoints reflecting liquidation, conversion, and participation preferences.
TaxGuy, CFA will help you get into some valuation shops, but since you already have a CPA, you could just as well do the ABV or ASA, and probably have sufficient credentials. The only valuation shops that require CFA are usually run by CFAs, and that’s just an artificial barrier to screen candidates.
Is any of this still so today? What about valuations for closely held Businesses to help with estate and continuation planning. What valuation credential is best for that?
BBA (Finance & International Business) 1998,
MBA (With a Global Perspective) 2011,
ChFC 2018, Completed CLU program 11/30/18
Owns an Independent RIA/Insurance Agency
Series 65, Life, Annuities, Health (Expired 6,63)
I’m currently working through an estate and the appraiser for the illiquid investments (investment partnerships and a closely held business) we’ve been using is a CFA charterholder and ASA.
Awesome! That opens up some possibilities. If I make it, I suspect will be the only CFA financial planner in my region. The other CFA is a University Professor. What is your role?
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No thanks, I don't want to increase my probability of passing.