Career Spotlight: Valuation
I created the Career Spotlight series to share my experience and the experiences of other women in the finance industry. My hope is that by highlighting various career paths in the industry and sharing our experiences, we can demystify these career paths, learn from each other, and expand what we view as options for ourselves.
Today, I’m highlighting what a career in valuation looks like. I’m sharing my own previous experience working at a large accounting and consulting firm. If you’ve never heard of valuation, get ready to learn! And even if you have heard of it, I hope sharing my experience as a woman in the industry will still be enlightening for you.
SO, WHAT IS VALUATION?
It may be fairly obvious from the name, but valuation professionals determine the value of something. That “something” might be a business, a piece of a business, or certain intangible assets. You might be wondering how anyone could place a value on something that isn’t tangible, but there’s an entire industry built around doing just that!
The inherent value of a business is often worth more than simply the sum of its physical assets. For example, customer relationships and a brand name can have value. And even on top of the value of those intangibles, a buyer will often pay an even higher price, and that extra value is considered goodwill.
Valuation professionals may be engaged for several reasons. For example, someone selling their business may hire a valuation expert to determine a fair price. After one business has purchased another business, valuation professionals are engaged to assist with valuation for financial reporting. Valuation experts can also be engaged to value stock of a private company.
HOW DID I BECOME INTERESTED IN VALUATION?
I was a finance major in undergrad and I really enjoyed learning about valuation in my classes. Of course, learning valuation in an academic setting can be very different from how the methods are employed in real life. I did a valuation internship with a large accounting firm in between undergrad and graduate school and was able to get a taste for valuation work outside of the classroom. I enjoyed the internship, so I decided to pursue a full-time career in valuation after graduate school.
WHAT ARE MY KEY RESPONSIBILITIES?
Valuation is good for people who enjoy a structured environment. For the most part, I always knew what I was going to do on a given day. Responsibilities change depending on the nature of the project, but there are typically five major buckets of tasks that need to be completed for each project:
Pre-Engagement Work: before a project can start, there are several administrative items that need to be completed:
First, the potential client must pick our firm to do the work. Proposals are presentations used to convince potential clients to hire us. Involvement in proposal creation increases as you move up in the firm because as you move up, your responsibility for winning projects increases. However, even as an associate, I sometimes got to help make the PowerPoints, which I enjoyed.
After the project is won, Engagement Letters and Statements of Work (SOW) need to be executed. These are legal documents that detail exactly what our clients are hiring us to do and the proposed fee for the project. These documents are crucial to any engagement because it ensures that the firm and the client are on the same page about what needs to be done.
If the valuation practice is part of an accounting firm, which is common, running Conflict Checks is an important step because there are certain regulations that prevent auditors and valuation experts from doing work for the same client.
Gather Background Info: before the actual valuation can be started, it is important for the valuation team to learn about the client’s business. This is usually accomplished with Management Calls, where the management team explains their business model and financial projections. Additionally, if the business operated in an industry that was unfamiliar to me, I would spend time doing general Industry Research to learn about the important trends that may affect my valuation of the business.
Perform Valuation Analysis: the fun stuff! I won’t get into too much of the technical detail here, but there are typically three methods used to value a company and the weighted average of the methods is used as the final concluded value of the target business:
DISCOUNTED CASH FLOW METHOD
This method involves projecting the future cash flows of the target business.
GUIDELINE PUBLIC COMPANY METHOD
This method compares the target business to public companies that have similar business models and are in the same industry. Based on what the public companies are trading for in the market, the same multiples can theoretically be applied to the target business.
GUIDELINE TRANSACTION METHOD
This method uses acquisitions that have already happened in the industry. Based on what was paid for those acquired companies, the same multiples can be applied to the target business.
The methods described above are used to value a business or business unit. As I mentioned, valuation professionals can be engaged for several different reasons and other methods may be employed for different circumstances. I could write multiple articles on all the nuances of valuation (and maybe I will!), but those three are the most common methods.
Review and Adjust: after the initial valuation is complete, it goes through several levels of review. A typical review process involves a senior associate checking the associate’s work, a manager and/or senior manager looking over the work, and a partner signing off. A second partner, who was not involved in the process, may also review for overall quality. It may seem like a lot of reviewing, but the concluded value is often used for the client’s financial reporting and therefore is audited by the client’s auditors. Having many levels of review on the front end can save a lot of back and forth with the auditors later.
Narrative Report: once the valuation is finalized, the team creates a narrative report to accompany the concluded value. The narrative report discusses overall macroeconomic trends and industry trends that have an effect on value, as well as detailing each of the methods used.
WHAT ARE MY FAVORITE PARTS ABOUT THE ROLE?
There are several things I enjoyed about my time in valuation:
Performing a valuation analysis can feel like a big puzzle and it’s a great feeling when the pieces start to come together.
I am someone who enjoys being “right” (who doesn’t?). And at the end of each valuation, there is a “right” answer and I loved that sense of closure. Of course, the work would usually later be audited and we’d have to defend our answer, but I also enjoyed that aspect.
Like I mentioned, valuation can be a very structured environment and for the most part, I liked that because I knew what to expect.
WHAT ARE MY LEAST FAVORITE PARTS ABOUT THE ROLE?
There’s a few things I didn’t like about valuation:
Sometimes, valuation can feel like you’re just checking a box for the client. For example, valuation experts are often brought in to value certain intangible assets after an acquisition is already complete. In those cases, the total value is already known (the purchase price), it’s only a matter of how that value gets distributed among various asset classes.
And while it’s important to determine those values for financial reporting purposes, it was hard for me to feel like I was truly helping the client. I strongly preferred the more consultative engagements, like helping clients determine what their business would be worth if they sold it.
Another aspect of valuation I didn’t enjoy was audit season. If you’re working at an accounting firm, you’ll often need to help the auditors if they have clients that had valuation work done that year. If you don’t know anything about audit season, it’s a lot of long days and weekends. They actually call it busy season!
WHAT ADVICE WOULD I GIVE TO SOMEONE INTERESTED IN VALUATION?
The biggest piece of advice I would give to someone interested in valuation is to learn the basic valuation methods and technical skills. The basics are often taught in college finance classes, but I can tell you from experience that the level of technical skill required to excel in valuation is often much higher than what is taught in school.
While you will likely have to learn a lot on the job, there are several ways to come in more prepared, such as taking valuation-specific online courses. Additionally, especially in large firms, certification is often required or strongly encouraged. Certifications such as the Chartered Financial Analyst (CFA) and the Accredited Senior Appraiser (ASA) designations are common among valuation professionals.
IS THE VALUATION FIELD WELCOMING TO WOMEN?
Almost everyone I worked with and interacted with was a man. It’s difficult to feel welcome when you’re usually the only woman in the room. However, I do think valuation can be a great career path for women. I feel the work is more of a meritocracy than some other fields in finance can be.
To excel in valuation, you have to know the technical valuation methods very well and it’s hard to hide if you aren’t proficient. That’s something I really enjoyed about the work because it’s harder for managers to make biased choices about who gets put on certain projects.
WHAT CAN BE DONE TO INCREASE FEMALE LEADERSHIP IN THE INDUSTRY?
There’s a lot of work to do to get more female leadership in the industry. I think it’s going to take a concerted effort from several angles to increase diversity in the industry. First, I think teachers and professors should do more to encourage their female and minority students to consider finance careers early on. Of course, I realize this problem doesn’t just start in college…
Girls are often told from a young age that they’re bad at math and science. These are called “entity theories” and it has been shown that these messages can have adverse consequences on achievement such as lowered persistence and impaired performance. So even before college, teachers should encourage girls in math and science.
Additionally, I think recruiters need to work harder to seek out diverse talent at all levels. It’s natural for people to hire candidates who look like themselves. I know finding diverse talent can be difficult, so it’s also important for management teams to support the initiative and understand that it may take a longer time to fill positions. And when diverse talent is found, nurturing and retaining that talent is key. If women don’t see other female leaders and aren’t being encouraged to develop their leadership skills, they will likely leave. And lastly, understanding that increasing diversity in the industry is a mass structural and cultural change that will not happen overnight and it can’t be fixed quickly with a few “token” hires.
I hope this gives you some insight into what a job in valuation is like. Even though I don’t work in valuation anymore, I learned so much from my experience and I continue to use those skills in my current role.