What follows is a draft of a (very long) letter I am submitting to the Editor of the American Society of Appraisers’ journal, Business Valuation Review:
Dear Editor:
I am writing because I see several things that concern me about our business valuation (“BV”) profession. I offer some poignant remarks that hopefully induce a reaction from the journal’s readership. As a caveat, what follows is strictly from my perspective as a BV practitioner who earned his PhD and, for a time, became a finance professor and government regulatory economist, but who kept his ASA-BV designation and has volunteered for the American Society of Appraisers (“ASA”) in a number of roles.
BV distinguishes itself as a profession—it has standards of practice and a code of ethics. It requires demonstrating proficiency of an advanced body of knowledge both to obtain and to maintain professional credentials. By definition (Merriam-Webster Dictionary), a profession is “a calling requiring specialized knowledge and often long and intensive academic preparation.” This definition helps to point out my concerns: what knowledge makes our profession, how does that knowledge advance, and how do future leaders enter the profession and gain their academic preparation.
What knowledge makes our profession and how is it acquired?
Dr. Shannon Pratt’s magnum opus, “Valuing a Business”, and IRS Revenue Ruling 59-60 (“59-60”) are both cornerstones of our BV profession. However, both direct us to analyze a number of factors that are simply not even mentioned in mainstream finance textbooks. Take as an example “the history of the enterprise since its inception”: Do you even know what General Electric did when it was founded? Hint: it has nothing to do with its aerospace business today. Aerospace was not even an industry when Thomas Edison himself founded Edison General Electric Company back in 1889! As a finance professor, I have taught investments, corporate financial management, and financial statement analysis and valuation, and this particular factor has appeared in none of the widely-used college textbooks I used for those courses.[1]
On the flip side, why is the large and growing body of finance research—on topics of central interest to valuations—go unmentioned in BV Review and other BV publications? For example, in finance research, what is often called “firm-specific risk”[2] is connected to what we call the company specific risk premium (“CSRP”). For some time now, finance researchers have explored the effects of firm-specific risk on important finance variables related to valuation. Instead, what I have seen in BV publications is just a repeated reminder of how challenging and yet how important CSRP is to valuations, but that there is still no generally accepted way to quantify it. How does that help us be smarter or better BV practitioners, particularly when it doesn’t include what seems like relevant research?
What I really see is a disconnect, where BV has seemingly distanced itself from ongoing research. The ASA annual conference took place recently in New Orleans. However, in looking at the program I did not see many connections to current research in finance. Instead, I went to a finance research conference where there were more than 200 sessions, each typically with two to three research papers. Although most touched on a range of topics in finance that did not seem to have a direct bearing on either private securities (outside of venture capital or private equity) or intangible assets, I still found close to a dozen papers which could directly affect and potentially improve BV practice.[3] Why does this matter? How does it help?
How does that knowledge advance?
First, if BV knowledge is not updated, then what good is it to attend conferences, other than to learn about the latest court cases or other creative reconstitutions of existing BV ideas? We already get a regular stream of such updates from the information providers that dominate the BV market, and from following each other on social media. Looking at the “Highlights of What’s New in This Edition” section in the 6th edition of Valuing a Business (“VAB-6”), there are several new chapters and sections added, but most of the updates appear just to be updated guides on how to use BV tools; even the new chapters appear to be just new applications of existing knowledge. It’s a wonderful reference book, but where is the new science, the new thinking that leads to new and improved solutions? Updating our BV body of knowledge with current research is a must if BV is to advance and to attract young new talent to the profession.
Second, presuming you accept my prior assertion that BV has to be updated in order to advance, how can existing BV knowledge be updated if it does not connect with new research? New research “stands on the shoulders of giants.”[4] It cites and references existing knowledge and explains its own new incremental contribution, whether it be new theories or new empirical tests and analyses supporting new theories or refuting and challenging preexisting notions. Practically speaking, that means new manuscripts should cite prior literature, whether in valuation books, this BV Review journal or other journals. These well-referenced articles in turn invite other researchers who find them in their own review of existing literature to begin building new connections between their work and existing BV knowledge. A simple comparative example? The Journal of Finance alone has articles with more than 4,000 references to investment banking, spanning decades of research, continuing to present day – every new article building on and referencing existing knowledge and offering a distinct, new contribution to better understand investment banking. Why can’t BV research articles follow that example?
Recruitment and academic preparation of future BV leaders
The last point about attracting new talent is so important that it needs its own discussion. The BV profession is graying, and it is having trouble recruiting enough young talent to sustain itself, never mind grow. Some simple math: there are approximately 10,000 (ASA, ABV, CVA) credentialed BV professionals in the US. Assume for a moment there is another similar number of professionals working on designations or using alternatives (such as PhD or the CFA charter) to promote themselves as BV professionals. Assume further a 40-year BV career, and no growth in (or exit from) BV. These are all grossly simplifying assumptions, so feel free to adjust to your view of things. Then, 20,000 / 40 = 500 new folks entering BV per year just to replace those at the end of their careers, with no growth in the ranks of the profession. By the way, of the folks I’ve helped hire, I think only one has stayed in BV more than 10 years; the rest are all doing much better in VC, private equity, M&A, family offices, and so on. I don’t think my experience is an isolated one, either. That suggests the 500/year underestimates the true number of departures and need for new entrants. Perhaps we should ask BV recruiters their estimates of the overall annual entry/exit turnover in BV that happens with or without their intermediation.
Among the BV recruiters I know, this is a pretty busy time for them – demand seems to be outpacing supply; the market is not clearing quickly, which tends to lead to upward wage pressure. VAB-6 was published in 2022 partly as a tribute to Shannon Pratt, who died in late 2021, but the majority of the authors of VAB-6 are themselves approaching retirement, and indeed several have already retired. The average age in BV is creeping up. Of the three major BV credentialing valuation professional organizations (“VPOs”) in the U.S., ASA is in third place as far as recruiting and engagement of college students and young professionals, but it’s not far behind the other two, whose own university relations programs have not made significant progress to attract young talent to the BV profession.
What twenty-something wants to go into BV when an undergrad finance or accounting degree, never mind an MBA, offers so many other high-profile career paths? My own first BV job was originally from an interview for an “M&A analyst” position; I had no idea what my future boss was saying about BV for non-M&A purposes. Nothing in my MBA prepared me for a career in BV. There is exactly one university in the U.S. that offers a BV “degree”, and it’s actually a 5th year accounting program with one valuation class. A handful of other colleges and universities offer one or two valuation classes – not enough even for a minor, much less a degree. Still, their graduates are ahead of the field in joining the BV profession.
In that regard, our friends at CBV Institute are far ahead, partnering with several of the top Canadian universities to embed BV education leading to the CBV exams into those schools’ programs, and partnering with most of the top employers in Canada. This creates a virtuous cycle of education-placement-retention-advancement-recruitment, rather than the model in the US that I’ve discussed with a number of experienced BV practitioners: convince new grads to go into BV, eat the cost to train them on the job, send them to BV credentialing education, then lose them after a year or two, and restart the cycle. Not surprisingly, then, who are the most in-demand BV professionals? Two-to-five years of experience with credentials or ready-for-credentials.[5]
Many older BV leaders are past that part of practice-building, and for younger ones, perpetual hiring-training-replacing drains energy and profits and drags on their firm’s ability to grow. There’s got to be a better way – a way to get college students interested in BV as a profession and stable career – but students go to college to learn new things, they are excited by new developments, new ideas, and that means bringing new research and new thinking into the BV body of knowledge.
Some ideas and spit-balling
In the past, for too short a time, BV Review featured “Valuation Research Notes” (Levine, 2007-2009), which included writeups of academic research papers.[6] This provided an excellent connection between finance research and BV knowledge. As a CFA charterholder, I made similar contributions[7] to CFA Digest, and have benefited from the ongoing publication of such short summaries and digests of relevant research. One idea, then, would be to resume the practice, and again routinely ask the readership to submit links to articles and their own digests (anywhere from one paragraph up to a full writeup, as was done in “Valuation Research Notes”).
Academically-connected BV practitioners have also advanced BV knowledge with articles published in BV Review.[8] At the same time, BV practitioners have also connected their articles with relevant scholarly research.[9] In doing my own research to support this Letter to the Editor I came across several Editor’s Column letters from Dan McConaughey, when he was editor of BV Review, where he called for additional research paper submissions (2013) while suggesting BV practitioners partner with academic scholars, later re-emphasizing the importance of documentation and literature review as part of research papers (2015), and again thanking academic scholars for bridging “the gap between ‘practitioners’ and ‘academics’ very well” (2017). My takeaway is not that we should leave valuation-relevant research to academics, but that we should focus on the new, incremental contribution of manuscripts submitted to BV Review, that the way academics go about literature review is a useful example, and that articles that narrow the gap between academia and practice, published by practitioners with and without academic coauthors, help advance the BV profession.
On the topic of BV education and drawing new entrants into the BV profession, there is one idea I have been discussing with a number of long-time BV folks in the past few months, and that I would like to share publicly now: given the demand for young but recently BV-trained professionals, it seems there is an unmet need for formalized BV college education in the US. Whether it follows the Canadian CBV model (more or less fully partnering with universities to offer courses leading up to the six CBV credentialing exams), or some other developmental path, is something that will be sorted out among the parties contributing to such a solution. The necessary participants include (1) one or more business schools willing to domicile and grant such a degree, to approve its courses for credit, and to support its promotion and student recruitment, (2) licensed content and a pathway to credentialing exams from one or more BV credentialing organizations, (3) one or more practitioner and PhD trained academic faculty, and (4) connections to and support from BV conferences and BV content providers, and of course, (5) internship and permanent hiring opportunities for BV college graduates.
Why? How would it affect existing BV education? Such a degree builds on existing BV course offerings around the country and takes them to the next logical level, which has existed in the past (there are BV practitioners with a “BV” college education). It changes the hire-train-get poached-rehire industry dynamic that currently reduces incentives to pay for staff’s credentialing education. It introduces a BV career to prospective college students, raising awareness of our industry even for those who go on to alternative careers (which isn’t so bad when some of them end up in careers such as trust and wealth management or law and become future referral sources). It fosters a better appreciation and understanding of the relationship between research and practice, especially in future BV practitioners. It does so without jeopardizing or diminishing the value of BV credentialing paths for current practitioners, paths which will still need to exist for the majority of the BV profession even after BV degree graduates enter our workforce.
Indeed, very recently I discovered that this is not a new idea. The ASA’s College of Fellows took up this idea as far back as 1976 (and perhaps earlier, but the first published Opinion[10] I found was from 1976). Aptly named “Education for Appraisers,” the 1976 opinion[11] goes on to document that ASA initiated contacts in 1974 “with 55 colleges/universities to discuss, plan, and implement a Valuation Sciences Degree Program.” A few years later, the College of Fellows returned to the topic with a 1989 opinion[12], which was concerned with “illegal ‘degrees’” (earned from so-called “diploma mills”) and concluded: “Appropriate evaluation of educational criteria can best be achieved through the medium of documentation issued by recognized and fully accredited colleges and universities, together with an alternative evaluation program that recognizes equivalent professional education.” One would think that such emphasis would have led to the seeding and spread of collegiate BV education.
Unfortunately, as late as 1996, little progress had been made, and the College of Fellows issued yet another opinion[13], which so far appears to have been its last on the topic. It left us with two interesting sources of information, which appear relegated to the dustbin of history:
- “In 1974, ASA took the first steps in initiating and supporting a formal “Valuation Sciences Degree Program” based on the concept of academic accreditation to achieve a professionally recognized appraisal education program.
- The International Board of Governors adopted a series of resolutions authorizing creation of the program. The ASA Educational Foundation adopted parallel supportive resolutions. The ASA Executive Committee assisted in the creation of a National Advisory Council composed of representatives of Northern Illinois University, Hartford University (Connecticut), Union for Experimenting Colleges and Universities, University of North Carolina, Positive Futures Inc., and the U.S. Department of Transportation.
- “Guidelines for the Baccalaureate in Valuation Sciences” was published in July 1976. Negotiations were undertaken by ASA with representatives of approximately sixty academic institutions. Observers of the joint ASA Executive Committee/National Council meetings included the American Council on Education and U.S. government representatives from the departments of Health, Education, and Welfare; Housing and Urban Development; Transportation; and Justice. The first “Memorandum of Understanding” was signed June 16, 1976, between ASA and Hofstra University in New York. In 1979, the first two valuation sciences degrees were awarded, one in the discipline of real property and one in the discipline of personal property.”
- “In May 1994, Kaunas University of Technology (Lithuania) introduced valuation science/appraisal into its business administration degree programs. Electives in the Bachelor of Business Administration Program (160 credits, 8 semesters) were rearranged; six basic appraisal courses were added. In the Business Administration Masters Degree Program (80 credits, 4 semesters), four curriculum tracks were structured, one of which would be selected by the student for mandatory completion of requirements for a business administration master’s degree with a specialty in valuation science/appraisal. The four tracks are business valuation, real estate valuation, personal property valuation, and machinery /equipment valuation.”
Where are these resolutions adopted by the International Board of Governors and the ASA Educational Foundation? Where is that Memorandum of Understanding between ASA and Hofstra? Where are these “Guidelines for the Baccalaureate in Valuation Sciences” published in July 1976? Where is there any information about the launch of the valuation degrees in 1994? Not in any online or library catalog I could find. So much for the power of the internet. Where is the institutional memory of these substantial efforts? Retired and gone, I’m afraid. A lot of BV work is still done for estate purposes. Where was the legacy and estate planning for this intellectual property? What would our lawyer and CFP referral sources think about that?
That 1996 opinion left us an unfulfilled legacy with its final parting shot: “It is the Opinion of the College of Fellows that the American Society of Appraisers should continue to encourage its members to seize every available educational opportunity that will lead to professional practice and professional status. The society should continue to stimulate interest in, and offer full support for, both short courses and the Valuation Sciences Degree Program.” That was 1996, whose 30th anniversary is fast approaching. What can I say of all those efforts? To paraphrase T.S. Elliot, from his poem “The Hollow Men”[14]: “…this is how [it all] ends, not with a bang but a whimper.”
In closing, I see several things that concern me about our BV profession, but I also see opportunities for improvement and growth. I don’t want to spend my BV career just retreading a now-63-year-old ruling from the IRS and just selling another engagement … still treating RR 59-60 like the three tablets[15] Mel Brooks brought down from Mt. Sinai in the movie “History of the World, Part I”. For my part, I will do what I can to help establish a new “Valuation Sciences Degree Program” and recapture that energy and focus on research and learning of new ideas that appears to have dimmed from our collective consciousness. I welcome comments, reactions, questions and inquiries from our members and readership, and look forward to helping our profession and the next generation of BV professionals.
Yours truly,
Victor Jarosiewicz, PhD, ASA, CFA, CAIA
About the author: Dr. Victor Jarosiewicz, ASA, CFA, CAIA is the founder of Quid Valorem, LLC, a business valuation firm with offices in Florida and Virginia. Dr. Jarosiewicz is a former editor of the Business Valuation Review, and is the incoming Chair of The Appraisal Foundation’s Business Valuation Resource Panel for 2024. He earned his AVA designation in 2001 (currently inactive), his CFA charter in 2003, his ASA-BV designation in 2007, his PhD in finance and strategic management from the University of Florida in 2017, his CAIA charter in 2019, and is currently completing the requirements for his CFP designation. His research on venture capitalists on boards of directors and on executive management has been published in the Quarterly Journal of Finance and the Strategic Management Journal. Dr. Jarosiewicz has taught ASA BV202, helped rewrite ASA BV203N, and as a finance professor at two universities has taught Fundamentals of Financial Management, Financial Markets and Institutions, Investments, and Financial Statement Analysis and Valuation.
[1] See, for example, Investments, Bodie, Kane & Marcus; Financial Statement Analysis and Valuation, Easton, McAnally, Sommers & Zhang; Fundamentals of Financial Management, Brigham & Houston. Pick any edition; I taught from editions current circa 2018, and for some texts I have older copies from my own MBA circa 1999.
[2] See, for example, Brown, G., & Kapadia, N. (2007). Firm-specific risk and equity market development. Journal of Financial Economics, 84(2), 358-388, and Dittmar, R. F., & Lundblad, C. T. (2017). Firm characteristics, consumption risk, and firm-level risk exposures. Journal of Financial Economics, 125(2), 326-343.
[3] See, for example, the conference program at https://www.fmaconferences.org/Chicago2023/ChicagoProgram.htm. In the near future, I hope to summarize the relevance and contribution of the submissions I thought relevant to the BV body of knowledge, and how BV education and practice might benefit from incorporating such advances in valuation research.
[4] Quote attributed to Sir Isaac Newton, Isaac Newton letter to Robert Hooke, 1675, see https://discover.hsp.org/Record/dc-9792/Description.
[5] In particular, I recall an AICPA FVS podcast interview earlier this year of BV recruiter John Borrowman by Nene Gianfala (“Recruiting Challenges in BV: The Perfect Storm”, May 11, 2023, https://podcast.app/recruiting-challenges-in-bv-the-perfect-storm-e333179715/) pointing out how the BV industry is facing a “Silver Tsunami,” and that among the most in-demand roles of BV professionals are those with two to five years of experience.
[6] See https://meridian.allenpress.com/bvr/search-results?f_Authors=Lawrence+M.+Levine.
[7] See https://www.cfainstitute.org/en/search-archived#q=Jarosiewicz&sort=relevancy.
[8] For example, see https://meridian.allenpress.com/bvr/article/36/3/85/66513/Valuing-Convertible-Bonds-A-New-Approach by Finnerty and Tu (2017), Damodaran (2015) https://meridian.allenpress.com/bvr/article/34/4/152/66430/The-Small-Cap-Premium-Where-Is-the-Beef, and Covrig et al. (2021) https://meridian.allenpress.com/bvr/article/40/3/80/476901/Volatility-of-Financial-Metrics-Important-Data-for.
[9] See, for example, Helfenstein (2017) https://meridian.allenpress.com/bvr/article/36/4/130/66494/Testing-the-S-Corp-Value-Premium-for-Realism-and, and Grabowski (2018) https://meridian.allenpress.com/bvr/article/37/3/93/66549/The-Size-Effect-Continues-To-Be-Relevant-When.
[10] See https://www.appraisers.org/about/college-of-fellows/college-of-fellows-opinion-articles for a list of College of Fellows Opinion Articles.
[11] See https://www.appraisers.org/docs/default-source/college-of-fellows-articles/7341_education-for-appraisers.pdf.
[12] See https://www.appraisers.org/docs/default-source/college-of-fellows-articles/7343_recognition-of-academic-degrees-or-equivalent-professional-education.pdf.
[13] See https://www.appraisers.org/docs/default-source/college-of-fellows-articles/7326_appraisal-education-summary-review.pdf.
[14] Eliot, T. S. (1927) [1925]. Poems 1909–1925. London: Faber & Faber, 128.
[15] See, for example, https://www.imdb.com/title/tt0082517/.