ClarityBV Blog

Contrasts running through my mind as we head off for a long holiday weekend…

• Me vs. You
• Price vs. Value
• Features vs. Benefits
• Know-How vs. Know-Why
• Cheap vs. Bargain
• Luxury vs. Premium
• Marketing vs. Sales

Looking forward to meeting with Chad Root from Spearhead Sales in early June. Want to flesh out ideas for some “creative destruction” of business valuation services in Michiana.

Chrysler’s letter to dealers (pdf) that are being “rejected” is a stark example of the potential drop in value from an orderly liquidation to a forced liquidation premise of value. The letter states that Chrysler will be “unable to repurchase” the dealers’ inventories, but will help redistribute them among the remaining Chrysler network.

Automotive News has a list (pdf) of all the rejected dealers. A couple of local dealers were among the rejected, Gurley-Leep Dodge and Heart City Automotive. Gurley-Leep’s website is already featuring “new vehicles for pennies on the dollar.”

Today, more than 1,000 GM dealers expect to receive similar notices.

Over the weekend, I had a chance to read one of my favorite reports – the latest annual report from Martin Capital Management (“MCM”). (Note: I am not affiliated in any way with MCM. I became aware of them several years ago, as we are based in the same community.)

I always add several books to my reading list based on references in these reports. Even the end notes contain lots of food for thought. Following are just a few of the observations I jotted down this year.

1. When calculating a price to earnings ratio, Ben Graham suggested using the average earnings of the last 7 to 10 years to gain a better sense of earning power over a full business cycle.
2. A great quote from Machiavelli regarding forecasting and history, “Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus they necessarily have the same results.”
3. MCM notes that they used the word “risk” more than 50 times in their 2008 report. They do not necessarily equate risk with beta or volatility as in modern portfolio theory. MCM notes that risk may be divided into three broad categories: valuation risk; business or earnings risk; and, balance sheet/financing risk.

An industry colleague kindly pointed out a credential missing from my last post, the CFA charter issued by the CFA Institute. While the CFA’s emphasis may tilt toward public security analysis, the body of knowledge is extremely relevant to private company valuation.

Based on the CFA’s requirements, I would place it in a class with the Accredited Senior Appraiser designation. The CFA requirements include the following (among others).

• 48 months of acceptable professional work experience in the investment decision-making process
• Completion of all three levels of the CFA Program (includes 3 exams over a 3-year period or longer)

Because the business valuation profession is largely self-regulated, many business advisers may offer valuation services. However, not all valuations or credentials are created equal.

Valuations are typically needed at major events in the life of a business, such as an acquisition, owner buy-out, litigation, or tax reporting. The cost of relying on an incomplete or formulaic analysis may be huge.

Credentials are not the only factor to consider in hiring a business appraiser. However, a basic understanding of valuation credentials can be a good way to narrow your options.

• ABV – Accredited in Business Valuation; American Institute of Certified Public Accountants (AICPA)
• ASA – Accredited Senior Appraiser; American Society of Appraisers
• CBA – Certified Business Appraiser; Institute of Business Appraisers (IBA)
• CVA – Certified Valuation Analyst; National Association of Certified Valuation Analysts (NACVA)

Following is an overview of these credentials in ascending order of difficulty to obtain (my personal opinion). Just for fun, I equate them to different modes of transportation.

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Tricycle Class:

- Certified Valuation Analyst (CVA)

NACVA is a for-profit organization that issues the CVA designation. The CVA designation requires completion of a 5-day Business Valuation and Certification course, a proctored exam, a case study, and two years experience as a CPA.

The CVA has no minimum valuation experience requirement. For context, there are about 8,000 active CPA licensees in Indiana and about 70 CVA credential holders in Indiana.

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Training Wheels Class:

- Accredited in Business Valuation (ABV)

The AICPA is the national association for CPAs and issues the ABV designation. The designation of ABV requires that members hold a valid CPA certificate and pass a business valuation exam.

Substantial involvement in at least six engagements or 150 hours experience is required. There are about 8,000 active CPA licensees in Indiana and about 60 ABV credential holders in Indiana.

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Bicycle Class:

- Certified Business Appraiser (CBA)

The IBA, which was recently acquired by NACVA, issues the CBA designation. It requires members to hold a 4-year college degree or equivalent, complete 90 hours of coursework or have 10,000 hours of experience, and complete a written exam.

CBA candidates must submit two examples of their work for review before earning the designation. There are only a few CBA credential holders in Indiana.

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Motorcycle Class:

- Accredited Senior Appraiser (ASA)

The American Society of Appraisers is a multi-disciplinary appraisal organization that issues the ASA designation. The ASA initially requires passing an ethics exam and an exam on the Uniform Standards of Professional Appraisal Practice.

An ASA applicant must then pass certain principles of valuation courses or demonstrate equivalency. A minimum of five years (10,000 hours) of full-time equivalent appraisal experience is required, along with submission of a representative appraisal report for review. There are about 20 ASA credential holders in business valuation in Indiana.

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Final thoughts: Credentials are just one piece of the puzzle in hiring an appraiser. But, they may help to distinguish a “dabbler” from a dedicated “craftsperson.”

I have met many good people associated with all of the credentials and organizations listed above. However, it is frustrating that such a relatively small profession cannot come together in recognition of a common set of standards and credentials. In the meantime, caveat emptor!

[Edit May 9, 2009: See subsequent post for an additional credential, the CFA charter, not included in the list above.]