NACVA praises new cost of capital model

BVWire quotes an article in QuickRead, a publication of the National Association of Certified Valuators and  Analysts (NACVA), that says the Implied Private Company Pricing Line (IPCPL), 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."

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.