Issue link: https://www.e-digitaleditions.com/i/499026
64 BizEd MAY | JUNE 2015 ideas in action ILLUSTRATION BY GREG MABLY Adding Value COMPETITION TACKLES TOPIC THAT TEXTBOOKS OVERLOOK WHAT SHOULD PROFESSORS DO when standard textbooks omit an important area in their discipline? They could follow Herbert Kierul 's lead—launch a student competition to address that missing piece of the puzzle. Kierul, the Snellman Professor of Entrepreneurship and Finance at Seattle Pacific University's School of Business, Gov- ernment 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, pub- licly traded companies and their investments, says Kierul. "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 compa- ny 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 evalua- tion 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 Kierul, "an obvious educational gap exists." Kierul held the first Private Busi- ness 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 iden- tifying names and locations removed. Three representatives from Moss Adams judged students' final presentations. The challenge remained a class- room 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