A new research paper examines the theory behind the implied private company pricing line (IPCPL), a method recently introduced to eliminate the inherent problems in comparing public and private data and to add another approach in estimating the cost of capital for a privately held business. The paper calls IPCPL a “significant innovation in the valuation of privately-held, small-or-medium-sized enterprises (SMEs).”

Bridging the gap: The paper, written by David H. Goodman (Gosule, Butkus & Jesson LLP) and Malcolm McLelland (Equilíbrio Cursos Ltda.), points out that some appraisers believe that SMEs can be valued using data from public capital markets, but other appraisers disagree. The IPCPL developers “have suggested that, intuitively, the IPCPL valuation method ‘bakes-in’ differences between private and public equity markets (e.g., private versus public market pricing of liquidity). While there seem to be skeptics of this idea in online public forums, our exposition of IPCPL theory in this paper shows that this idea—properly interpreted—is essentially true,” the paper says.

The paper puts forth a quote by R. Buckminster Fuller: “If you want to teach people a new way of thinking, don’t bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking.” The IPCPL, “we believe, is such a tool,” the authors say.

“Bob Dohmeyer, Pete Butler, and I appreciate the detailed and insightful analysis of IPCPL in the SSRN paper written by McClelland and Goodman,” Rod Burkert tells BVWire. Dohmeyer, Butler, and Burkert are the developers of IPCPL. “While we believe the IPCPL is, as the paper says, a tool to spark new ways of thinking, we want our appraisal colleagues, as well as valuation academicians, to read the paper and develop their own conclusions. We also encourage appraisers to utilize the free IPCPL-based BUM WACC calibrator tool that is updated monthly and available from Business Valuation Resources on a special IPCPL web page.”

To download the new paper, “The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory,” click here.