Business Valuation Review Volume 35: Issue 1

The largest unchartered territory on the business appraisal map is the private capital markets. These markets contain more than 99% of business entities comprising millions of companies and generate half of the gross domestic product of the United States and the world. Not only are the companies operating in these markets difficult to value, but there is no, one, unified agreed upon method of how to approach cost of capital determinations for valuation engagements. The intention of this series of papers is to take a look at how we approach cost of capital to value private companies. This first article will take a look at the practices and methods appraisers use as well as some of the problems with those methods. Article two will delve more deeply into understanding the differences in the private capital markets, clearly define the relevant financing and capital markets for privately held companies, and examine the private capital markets, including trends, current practices, and activities before concluding with a view toward relevancy.

The famous artist Salvador Dali is quoted as saying “What is important is to spread confusion, not eliminate it.” While this may be so in art, it is unlikely to be the mantra of any valuation practitioner. Valuation is practiced by thousands of individuals, and it is important that these practitioners all speak the same language so the clients who rely on these valuations can make unified and reasonable decisions. Problems arise, however, when similar language is used to mean different things to different people. Such is the case in business valuation and real estate appraisal. Generally, real estate appraisers and business valuation practitioners do not venture into each other’s territory. However, there is often good reason to do so, and these situations highlight the importance of consistency, particularly with respect to the use of language and the interpretation of language. For example, based on our own experience, the term “ unleveraged Internal Rate of Return [IRR],” as used by real estate appraisers, has been misconstrued by business valuation practitioners. This article addresses the conflicting use and misuse of “ unlevered IRR” by real estate and business appraisers.

The implied private company pricing line (IPCPL) was recently introduced to the business valuation literature as a means of using public equity market data to estimate the (fair market) value of small- and medium-sized privately-held enterprises. The IPCPL is based on the fundamental assumption that no arbitrage opportunities exist between privately-held and publicly-held equity. This is the fundamental assumption underlying modern asset pricing theory. Although the IPCPL has generally been presented in the literature as a method, a formal theoretical development and reconciliation of the method to existing asset pricing theory does not exist in the literature. We (a) present a formal development of IPCPL theory based on arbitrage pricing theory, (b) derive the assumptions under which the theory holds and the essential empirical predictions of the model, and (c) present an empirical model which can be used to test the theory and estimate parameters useful in estimating the value of privately-held equity interests.

Hello, everyone! The year 2015 was a great one for the ASA and its Business Valuation Committee. We have a lot in store for 2016 and are excited for our organization. Let me update you on a couple of new initiatives that we are excited about.

Technically Speaking …

Not long ago, someone correctly pointed out to me that the BVC/ASA did not seem to be taking a leadership position on putting forth opinions on technical issues. One important role of a professional valuation organization is to have a voice regarding controversial and cutting edge technical matters.

In attempt to

Editor's Column

Part I: Appraiser Versus Real World Debates: How Many Appraisers Can Dance on the Head of the Private Capital Markets?

Why Salvador Dali Would Not Have Made a Good Appraiser: BV and Real Estate Discount Rates

The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory

Two Methods to Adjust Observed Control Premia for Valuation Purposes

From the Chair

Technically Speaking …

Volume 35, No. 1 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue