The implied private company pricing line, a new model for estimating the cost of capital for small private companies, “is an exciting development and contribution to the cost of capital determination,” says an article in QuickRead, a publication of the National Association of Certified Valuators and Analysts (NACVA).
IPCPL aggregates 500 Pratt’s Stats private company transactions and directly estimates the aggregate IRR on free cash flows. By using fair market value prices paid for small privately held companies, all of the public security return extrapolation issues are rendered moot. Effects of liquidity, unsystematic and systematic risk, and taxes are already reflected in (i.e. “baked-in”) the market clearing prices.
“Based on the current work, results, and communication between the developers and the valuation community, the IPCPL Model will gain credibility and acceptance by valuators and users of business valuation in the near future,” writes Jeff Harwell (Harwell & Co.) who currently serves on NACVA’s Standards Committee. “Any valuator who appreciates the market approach or has operational or transactional experience will be drawn to the Implied Private Company Pricing Line like comfort food. While the cost of capital debate continues and one resource transitions, many of us can look forward to future developments, advancements, and another helping of IPCPL.”
The IPCPL model was featured in the September 2013 issue of Business Valuation Update, and the article is now available as a free download. In addition, you can learn more about IPCPL at BVR’s Cost of Capital Resource Center and receive monthly updates on the back page of the Business Valuation Update in the Cost of Capital Center section.
Please let us know
if you have any comments about this article or enhancements you would like to see.