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Simple409a.com Just another WordPress site 2017-01-11T22:54:33Z http://simple409a.com/feed/atom/ WordPress datadrivendesign <![CDATA[Does My Company Need a 409A Valuation?]]> http://simple409a.com/?p=1 2016-12-21T03:27:12Z 2013-11-09T20:22:09Z Have you heard of IRC Section 409A and wondered if it applied to your company? Do you think you might be in need of a 409A valuation but are unsure? Most entrepreneurs have never heard of IRC Section 409A , if you haven’t then check out our article here (http://simple409a.com/why-do-i-need-to-get-a-section-409a-valuation/). The majority of earlier stage […]

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Have you heard of IRC Section 409A and wondered if it applied to your company? Do you think you might be in need of a 409A valuation but are unsure?

Most entrepreneurs have never heard of IRC Section 409A , if you haven’t then check out our article here (http://simple409a.com/why-do-i-need-to-get-a-section-409a-valuation/). The majority of earlier stage companies find out from their investors or lawyer that they probably need a 409A valuation, but then they aren’t really sure how to do it or if they need to hire someone else to perform one.

Take our quiz below to help you find out if your company needs a 409A valuation now, and if you could potentially do it yourself or if you’d be better off hiring a 3rd party.

Please note that the information on this questionnaire is for education and informational purposes only, without any express or implied warranty of any kind. The Information contained in or provided by this questionnaire is not intended to be and does not constitute financial advice, legal advice, or any other advice. You should not make any decision, financial or otherwise, based on any of the information provided through this questionnaire without undertaking independent due diligence and consultation with a professional. You understand that you are using any and all information available on or through this questionnaire at your own risk and Tower59 LLC is not responsible for any decisions you make based on the results you generate from this questionnaire.

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datadrivendesign <![CDATA[My company is based outside of the United States, do I need to worry about IRS Section 409A?]]> http://simple409a.com/?p=182 2016-12-21T03:52:58Z 2013-10-07T03:51:45Z Are you looking to hire a U.S. citizen? Are you thinking of opening an office in the U.S.? If you answered yes to either of these questions and are considering issuing deferred compensation (for example stock options or restricted stock units) then IRS Section 409A should be on your radar. What is a 409A valuation? […]

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Are you looking to hire a U.S. citizen? Are you thinking of opening an office in the U.S.? If you answered yes to either of these questions and are considering issuing deferred compensation (for example stock options or restricted stock units) then IRS Section 409A should be on your radar.

What is a 409A valuation? A 409A valuation is a determination of the fair market value of your company, using IRS and AICPA standards of valuation, at a specific point in time.  IRS Section 409A stems from the American Jobs Creation Act of 2004. The rationale behind implementing the 409A provision was the necessity to have tighter standards for stock option reporting and to ensure the government received its share of taxable income. In a nutshell Section 409A means that when you issue stock options or other deferred compensation arrangements to employees, you must ensure the targeted exercise price is compared with an accurate fair market value of your company’s common stock as of the option grant date (or other compensation agreement date).

How do I comply with Section 409A? Before you issue any deferred compensation you need to determine the fair market value of your company and the stock you are going to issue. There is safe harbor that is provided when you hire an independent firm to perform a 409A valuation for your company. The independent firm will gather information about your company and determine a recommendation of the fair market value of your company and stock as of a specific date, the ‘valuation date’. You can then use the recommendation to help your Board determine at what price the deferred compensation should be issued. Ultimately, it is up to the company and its Board to determine the issue price, but if the IRS audits your company or your employees and asks how the issue price was determined you can show them the 409A valuation report as a piece of supporting evidence.

What happens if I do not get a 409A valuation before issuing deferred compensation? If you issue deferred compensation below your company’s fair market value then the penalties and charges include:

• 20 percent federal penalty
• The IRS tax underpayment penalty plus an additional 1 percent (premium underpayment penalty)
• Certain state penalties and taxes (for instance, California also imposes a 20 percent state tax, interest, and penalties)

In addition to the direct, out of pocket expenses, your funding and businesses partners may be put off by the penalties. On the other hand, if you overestimate the fair market value, your employees receive less income than they otherwise would have and will be unhappy.

Who can I talk to about my company’s 409A requirements? We would be happy to give you a free consultation to see if your company needs a 409A valuation. At Simple409A, we employ the approved valuation methods using our expert appraisers’ experience to ensure you get the right valuation for your company. We work hard to make the process easy on you so you can spend more time doing what you do best, and we have industry leading prices. Contact us and we can see if Simple409A is right for your company.

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datadrivendesign <![CDATA[How do I determine fair market value for an 83b election?]]> http://simple409a.com/?p=184 2016-12-21T03:54:59Z 2013-05-24T03:54:15Z If you already know you need to file an 83b election then the first question you probably have is how do I determine the fair market value of the “property” for the election? There are a few ways to go about determining the fair market value of the shares in your 83b election. If your […]

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If you already know you need to file an 83b election then the first question you probably have is how do I determine the fair market value of the “property” for the election?

There are a few ways to go about determining the fair market value of the shares in your 83b election. If your company is early days, i.e. pre-revenue, pre-investment (arm’s length or otherwise), pre-IP, and has minimal assets on the books, then you might be able to use the par value of the shares for the fair market value (verify this with your lawyer/accountant). However, if your company does not fit these criteria then you will need to calculate the fair market value using the accepted AICPA guidelines.

The three accepted approaches for determining the fair market value of your company are the Asset Approach, the Income Approach, and the Market Approach. After using the appropriate approach to determine the fair market value of your company you will then need to determine the value of your relevant share class. If your company only has one share class of shares then you can divide the enterprise value by the number of common shares and apply any relevant discounts (a discount for lack of marketability for example) to determine the value of your individual shares. If your company has more than one share class then you may need to leverage the option pricing model or an alternative method to determine the value of your individual shares.

Do you need a professional determination of your company’s fair market value? If so please <a href=”http://simple409a.com/contact-us/”>contact us</a> for a free consultation.

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datadrivendesign <![CDATA[What certifications are required to be qualified to issue a 409a valuation?]]> http://simple409a.com/?p=186 2016-12-21T04:22:27Z 2013-02-19T04:21:21Z Are there mandatory certifications? Can anyone issue a 409a valuation? There are no mandatory certifications to perform a 409A valuation, but the IRS does require that an appraiser have significant knowledge, experience, education and training. When choosing a 409A provider there are a couple of things you should consider: the first is whether the individual […]

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Are there mandatory certifications? Can anyone issue a 409a valuation?

There are no mandatory certifications to perform a 409A valuation, but the IRS does require that an appraiser have significant knowledge, experience, education and training. When choosing a 409A provider there are a couple of things you should consider: the first is whether the individual meets the IRS standard, the second is does the individual have the experience and reputation that ensures you will receive a quality report.

On the first point, the IRS standard does not specify any certifications or specific qualifications to perform a 409A valuation. The IRS standard for “significant experience” from the 409A final regulations is as follows:

“Generally, a person will be qualified to perform such a valuation if a reasonable individual, upon being apprised of such knowledge, experience, education, and training, would reasonably rely on the advice of such person with respect to valuation in deciding whether to accept an offer to purchase or sell the stock being valued. For this purpose, significant experience generally means at least five years of relevant experience in business valuation or appraisal, financial accounting, investment banking, private equity, secured lending, or other comparable experience in the line of business or industry in which the service recipient operates.”

In general this could mean an MBA and/or CPA, someone with at least 5 years relevant experience, and specific training in 409A valuations.

The second thing to consider is does this person/firm have a reputation for producing a quality report?

As a firm we have seen valuations performed by individuals who may have met the IRS standard, but the reports they produced did not pass due diligence or audit standards. These sub-par reports are generally thin, we have seen them as short as 3 pages, with brief, unsubstantiated conclusions. These unsupported valuations can lead to serious implications for employees in two ways: if the stock was undervalued there are tax liabilities, or if the stock is overvalued then employees can be left with options that are under water.

When choosing a provider you should be sure that the appraisers have the knowledge, experience, and education required, that they have worked with external auditors (the Big 4 accounting firms often require more supporting information and detail than the IRS for 409A valuations), and that the report they produce will provide the necessary background and support for the valuation

If you are looking for a qualified, experienced, and cost effective 409A valuation provider, you have come to the right place.
Get Your Professional Valuation Started Now

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datadrivendesign <![CDATA[Valuation Methods – The Asset Approach]]> http://simple409a.com/?p=188 2016-12-21T04:33:54Z 2013-01-04T04:32:32Z The asset approach is one of the three approaches (along with the market approach and income approach) used to estimate enterprise and equity value, and is used in IRC 409A valuations.  The asset approach is defined in the International Glossary of Business Valuation Terms as “a general way of determining a value indication of a […]

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The asset approach is one of the three approaches (along with the market approach and income approach) used to estimate enterprise and equity value, and is used in IRC 409A valuations.  The asset approach is defined in the International Glossary of Business Valuation Terms as “a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.”  The approach uses the books of the company to identify the fair value of the assets, both tangible and intangible, and the liabilities to determine a net value for the company.  Whereas the market and income approaches both focus on income statement activity, the asset approach primarily utilizes the company’s balance sheet.  The asset approach is often utilized when a company is no longer operating as a going concern and is preparing for liquidation.  Other times the asset approach can be used is when the business is based on assets, such as an investment vehicle, and not on income, such as a production company.

Steps in employing the asset approach are:

1)     Start with the balance sheet – ideally this will be “as of” the same date as the valuation date
2)     Restate assets and liabilities to fair market value where necessary – this can be the most judgmental step in the asset approach
3)     Identify unrecorded assets and liabilities and what their impact will be on the valuation – these may be off-balance sheet commitments or assets that are not on the balance sheet

Most of the items on the balance sheet are valued in a very straightforward nature.  Cash is cash.  Marketable securities can also be as easy as cash to value due to a stated market value.  Accounts Receivables and Prepaid Expenses typically have a fairly easy valuation.  Property, Plant & Equipment (“PPE”) and Inventory of a company can be more difficult to value.  These categories of assets should be considered carefully and valued appropriately.

There are times when a third party may be used to value certain elements of the balance sheet.  PPE is a good example of this.  For example, most valuation specialists are not specialists at valuing land and many companies may own land.  The same can be true for a machine used in production.  A company may have purchased the machine for one price and depreciated it to another.  However, the value of the machine may different from either of these values based on what it could be sold for on the open market.

Liabilities can also provide similar judgmental decisions for a valuation specialist.  While accounts payable and many accrued expenses are straightforward in their value due to a specific amount stated on an invoice, a liability such as a warranty accrual or a litigation accrual can be far less clear in its fair value and what it should be carried at during a valuation.  Significant consideration should be given to these more opaque items on the balance sheet when performing the valuation.

A last item where judgment may come in to play is with intangible assets, such as trademarks.  Self-created intangibles are not put on the balance sheet of a company and therefore do not automatically require valuing and adding to the balance sheet.  However, intangibles added through acquisition or purchase may exist and the skills of the valuation specialist need to be considered in whether or not to utilize a third party to value the intangibles.

The simplest way of thinking about the asset approach is:

Assets – Liabilities = Asset Approach Value

This also equals “Equity” on the balance sheet.  This is a very rough view but still a way in which someone could begin to gauge the value of a company through the asset approach before beginning a deeper look into each of the line items of the balance sheet.
Considerations that need to be made when using the asset approach are:

–        Premise of Value
–        Control
–        Marketability
–        Asset or Income based business
–        Going concern

The asset approach, whether ultimately relied upon or not, is important for a valuation specialist to consider in a 409A valuation.  Although used less often for operating companies which derive value from their income statement, an experienced valuation professional will still consider the impact a company’s assets will have on the value of that company, whether for 409A valuation purposes or otherwise.

Do you need a professional 409A valuation for your company?
Get Your 409A Valuation Started Now

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datadrivendesign <![CDATA[How Long Does a 409A Valuation Take?]]> http://simple409a.com/?p=190 2016-12-21T04:35:05Z 2012-12-12T04:34:07Z The time to complete a 409A valuation can range significantly: from a few days to a few months – mostly depending on the needs and the situation of the client. To get an idea of how the completion time of a 409A appraisal can vary so dramatically, it is important to understand the whole process, […]

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The time to complete a 409A valuation can range significantly: from a few days to a few months – mostly depending on the needs and the situation of the client. To get an idea of how the completion time of a 409A appraisal can vary so dramatically, it is important to understand the whole process, and the time required for each step.

Step 1 – Determine the needs of the company

Before starting a valuation, we establish whether a 409A valuation is right for the company in question. We also need to determine the most appropriate valuation date. In some cases, we will recommend a company wait several months before getting their 409A valuation so they get better value for their money (a 409A valuation has an expiration date).

If the company knows they need a 409A valuation and we can quickly determine the valuation date they need for their report, this first step may only take a few minutes on the phone. In other cases, this step involves engaging several people at the company including the board, investors, management, legal counsel and others. In that case it may take weeks to determine whether moving ahead with an appraisal and choosing a valuation date is appropriate.

Step 2 – Sign the engagement letter and collect payment

We use a digital signing system that makes signing the engagement letter fast and easy. We accept instant payment via wire and PayPal. We find it usually takes between a day and a week for us to receive these from the client.

Step 3 – Upload company documents

Using our secure web form, clients can quickly and easily fill in information about their companies and upload the necessary documents. However, in some cases this may take some time. A company might have to draft its 5 year financial projections. Also, in cases where the valuation date recently passed, companies will take some time to produce year to date financial statements. We have had clients complete this step within an hour and others have taken several weeks.

Step 4 – Complete draft 409A valuation report

We commit to complete the draft valuation report within three weeks. There are times when we may have to ask for additional information or documents. Provided those requests are responded to quickly, we usually complete the draft report within two weeks.
In cases where the company requires a faster turnaround, we do our best to satisfy those requests and have turned around valuations in as short as 3 business days. While this is not the norm, it is possible.

Step 5 – Draft review

Before receiving the final certified valuation report, we provide our clients with the opportunity to review the draft report. Next, we meet to discuss the assumptions and inputs to the valuation to ensure we have described the company accurately. If revision is required, it may add a few days to the total engagement time although most of our clients have been satisfied with their valuation the first time around.

Step 6 – Final certified 409a valuation report

Once the draft valuation is agreed to with management, we request a representation letter from the company which we provide. After this letter is signed and received, we deliver the final valuation report through a secure download link.

How much time is required for a 409A valuation?

In summary, the time required for a 409A depends on the unique situation of the company being valued. We have had valuations that only took 5 business days from the time the client first contacted us until when the final certified report was delivered. On the other end of the spectrum, the process has taken several months for other clients.
For planning purposes, we suggest companies start the process one to two months before they need the valuation to allow themselves adequate time to prepare the documents and properly review the draft report. However, if you need your 409A valuation in a hurry, contact us and we will do everything we can to provide it to you quickly.

Are you ready to start your valuation now?
Get Your Professional Valuation Started Now

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datadrivendesign <![CDATA[Valuation Methods – The Income Approach]]> http://simple409a.com/?p=194 2016-12-21T04:39:42Z 2012-11-30T04:38:37Z The Income Approach is one of the three approaches (along with the Market Approach and Asset Approach) used to estimate enterprise and equity value. The income approach seeks to identify the future economic benefits to be generated by an entity and to compare them with a required rate of return. This numerator/denominator relationship can be […]

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The Income Approach is one of the three approaches (along with the Market Approach and Asset Approach) used to estimate enterprise and equity value. The income approach seeks to identify the future economic benefits to be generated by an entity and to compare them with a required rate of return. This numerator/denominator relationship can be applied through a number of different methods such as:

  1. Discounted Cash Flows
  2. Capitalized Cash Flows
  3. Excess Cash Flows

For the purposes of this discussion, the focus will be on the discounted cash flow method and how it can be applied.

The first step in the valuation process, performed internally or externally, is to determine the future cash flows or “projections”. This will be the responsibility of the company’s management if using an external valuation specialist. The specialist should review the projections for reasonableness. The projections are typically performed for the upcoming five years. Although this is not a hard and fast rule, it is a rule of thumb that is commonly applied. Revenues and expenses should be projected forward from current results. The resulting amount should be appropriately tax affected to determine what the free cash flows of the entity will be. Other adjustments that should be considered are cash related items such as CAPEX, depreciation and amortization, to name a few.

After the free cash flows are determined, the entity’s numerator of the calculation is largely in place. Next, the denominator is the focus. The rate of return, or discount rate, for more developed companies is often determined through the Build-Up Method. CAPM is used in some circumstances, but the inherent difficulty in identifying a “beta” for the CAPM calculation causes many valuation specialists to use the Build-up Method. While this type of approach works for a company with more history, a new company or one just beginning to generate income and free cash flows poses a different challenge.

Investors seeking to assess a younger company may choose not to apply the income approach as it may not be applicable due to a lack of results on which to base projections. However, if there is a basis to work from, using the Build-up Method may not be appropriate. The rate of return for companies that are younger can vary quite a bit. Amounts from 20%-80% are often used for companies that are early-stage. The less risky and more reliable the projections, the closer the rate of return is likely to be nearer to the 20% end of this spectrum. Riskier, younger ventures with less proven results upon which to base the projections may use a discount rate closer to the 80% end of this range.

Taking the free cash flows discussed as the numerator and applying a rate of return, or discount rate, will result in the present value of future cash flows. The sum of these for the five years, based on the reasonable adjusted projections, provides one half of the value to be calculated.

Not many companies will simply end at five years. The valuation needs to also take into account the additional years of cash flows to be obtained. These cash flows can often be even more significant than the five years already detailed out. The terminal value, as this next amount is known, is generated by applying a long-term growth rate to the company’s free cash flows and discounting this total back to a present value as was done with the first five years’ projections.

When calculating the terminal value, the growth rate should consider the stage of the company and how it is likely to grow in the future. Many times, the United States GDP can be used as an estimate for this future growth. For well developed companies, exceeding this is unlikely. For earlier-stage companies, exceeding this is not uncommon.

The sum of the present values of the five year projected free cash flows and the terminal value provides the total enterprise value from the Income Approach.

  • Advantages
    • Widely recognized
    • Flexible in addressing companies of many different stages and natures
    • Simulates a market price even if there is no active market
  • Disadvantages
    • Relies on hypothetical projections
    • Utilizes a discount rate with many variables in determining the appropriate figure

The Income Approach, whether ultimately relied upon or not, is important for a valuation specialist to consider in a 409A valuation. Working with a company to determine future free cash flows can be valuable in learning more about the company.

Are you ready to start your 409A valuation? Contact us, and one of our appraisers will be in touch and we can get your valuation started.

Get Your Professional Valuation Started Now

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datadrivendesign <![CDATA[409A Valuation Report Components – Industry and Competitor Analysis]]> http://simple409a.com/?p=192 2016-12-21T04:38:24Z 2012-11-30T04:37:11Z The industry and competitor analysis portions of a 409A report review a company’s current market position and assess the environment in which the company is operating. This allows for the valuation of the company to be considered in the operating environment of the market. Industry Analysis There are several sources to leverage when researching the […]

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The industry and competitor analysis portions of a 409A report review a company’s current market position and assess the environment in which the company is operating. This allows for the valuation of the company to be considered in the operating environment of the market.

Industry Analysis

There are several sources to leverage when researching the industry for a company. The first step is to identify and define the correct industry. For US based companies the two most accepted industry classifications are the Standard Industry Classification (SIC) and the Global Industry Classification Standard (GICS).

Once the industry has been identified the analysis of the operating environment focuses on factors that impact the specific industry. Some of the factors impacting the industry, beyond those covered in the economic environment section of the report, include customers, suppliers, substitution products/services, access to capital, and government. Frameworks can be leveraged for an organized approach to this analysis. One commonly recognized framework is Michael Porter’s 5 forces, which focuses on the factors driving rivalry within an industry. Sources to leverage for the industry analysis include current news articles, studies, and published reports. It is important to ensure that the publication date is in line with the valuation date and that the sources being used are reputable.

Competitor Analysis

Identifying and understanding a company’s competitors is important when valuing a company for several reasons. Successful competitors can threaten a company’s access to customers and impact the long-term growth of a company, nascent companies or technologies can make current products and services obsolete, and competitor companies can be used as Guideline companies when utilizing the market approach for determining the fair market value of a company.

The problem with solely relying on a company’s own assessment of its competitors is that, surprisingly, many companies have not done a full competitive analysis of their own market. Or if they have, they have only focused on direct and established competitors. Direct competitors are usually easy to identify, they are the companies offering the same product or service as those produced by the company. To understand a company’s position in the market however, a broader scope beyond direct competitors needs to be considered. Are there indirect competitors out there who produce a product/service that meets the same customer needs as those that company meets, but through a different product/service? Are there indirect competitors out there who are working on producing a product/service that could render the company’s offering obsolete? These are all factors to consider when analyzing the competitive environment for the company.

Does your company need a 409A valuation?
Get Your Professional Valuation Started Now

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datadrivendesign <![CDATA[Do Employees Have to Worry About 409A Penalties?]]> http://simple409a.com/?p=196 2016-12-21T04:41:58Z 2012-11-12T04:40:08Z Sadly, yes. We have covered in other articles the importance of companies meeting safe harbor requirements for 409A by getting a qualified third party 409A valuation, but this regulation is also of great concern to employees. The implications for non-compliance can be severe, including significant 409A penalties. The following is an example of the kind […]

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Sadly, yes. We have covered in other articles the importance of companies meeting safe harbor requirements for 409A by getting a qualified third party 409A valuation, but this regulation is also of great concern to employees. The implications for non-compliance can be severe, including significant 409A penalties. The following is an example of the kind of hot water an employee can get themselves in when their company doesn’t make the effort to be 409A compliant.

An Example of IRC 409A Penalties

An executive in California received 50,000 stock options valued by the company’s board. The company had a recent round of funding in which the preference shares were valued at $20/share. bid vs ask . The board decided that a fair price for the stock options would be $2 – 10% of the value of the preferred shares.

The actual ‘fair value’ of the shares, when properly valued, was $5/share. Therefore, the options the executive received were undervalued by $3/share, which results in her receiving a $150,000 benefit on paper.

The executive would then be assessed for

  • 35% tax on the $150,000 ($52,500) plus a
  • 20% federal penalty ($30,000), and a further
  • 20% California state penalty ($30,000)

meaning she would have to pay out $112,500 of the theoretical $150,000 benefit in taxes and 409A penalties. She may even be required to pay the tax and penalties before she cashes out her options.

To make matters worse, if the value the common stock is less than $2/share when the company goes public or gets acquired, then the executive may have had to pay out $112,500 and won’t receive a penny from the ‘benefit’ that was assessed.

But Wait, That’s Not Fair!

I hear you, but we don’t make the rules. We do, however, help companies all over the USA avoid getting into issues with IRC 409A, and help their employees avoid 409A penalties, by providing a fast, easy, and affordable 409A valuation service. Had the company hired Simple409A, they would have only had to pay $2498 for a qualified, independent valuation. That would have saved the executive $110,000!

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datadrivendesign <![CDATA[409A Valuation Report Template]]> http://simple409a.com/?p=200 2016-12-21T04:43:24Z 2012-11-05T04:42:38Z There is really no ‘template’ for a 409A valuation. Section 409A came into being in 2007 and a cottage industry has sprung up to satisfy the reporting requirements, but the IRS has not given a lot in the way of definitive guidelines of what a 409A report should look like. The standards of quality and […]

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There is really no ‘template’ for a 409A valuation. Section 409A came into being in 2007 and a cottage industry has sprung up to satisfy the reporting requirements, but the IRS has not given a lot in the way of definitive guidelines of what a 409A report should look like.

The standards of quality and content for a 409A report are largely being driven by the Big 4 accounting firms from an auditing perspective. The AICPA Practice Aid has become the handbook for firms performing 409A valuations and contains guidelines in acceptable valuation and allocation methodologies. A 409A valuation is not just crunching the numbers for a company, it is taking into consideration the bigger picture of the environment and the economy in which the company is operating to help build an accurate picture of how much the company should currently be valued.

Based on our experience at Simple409A, the following is a good 409A valuation report template, or at least a 409A report example. A 409A Report should be 30+ pages and generally follow detailed analysis using this format:

Engagement overview

Part of Section 409A details the safe harbor protection that comes with having an independent, qualified party perform the 409A valuation. The engagement overview defines the relationship between the 3rd party and the company.

Overview of the company being valued

This section describes the company, its current product offerings, market share, and future growth outlook. It also details the company’s financial history, equity structure, management structure, and key employees. The company overview should include a look at leverage points or capacity constraints within the company.

Overview of the economic environment

It is important to consider the economic environments in which the company is operating. Monetary policy, foreign policy, and economic stability are all factors that will effect the company’s valuation.

Industry and competitor analysis

The industry overview typically contains not only an analysis of the current industry the company is operating in, but also performs a SWOT analysis of where the company currently sits in its industry. The competitor analysis reviews the direct and indirect competitors of the company in order to provide context for the company’s relative position in the industry.

Valuation theory overview

This section gives an overview of the generally accepted methodologies used in the valuation including the Asset, Income, and Market Approaches and the equity allocation techniques including the Black-Scholes model.

Enterprise valuation

This is the section that details the fair market value calculation for the company as a whole.

Allocation of equity

Once the fair market value has been calculated the value must then be allocated to the various share classes. Then a single share can also be discounted for lack of marketability or lack of control.

Summary and Results

This section discusses the findings and presents the value for 1 share of common stock. Usually this is all management cares about, however the previous sections are critical in making the IRC 409A valuation defensible when it is audited.

Certification

After concluding the objective analysis of the company, the report authors certify the valuation report with their credentials. A certified 409A valuation report assures management, auditors, and the IRS that it meets safe harbor requirements.

It is recommended that companies use a qualified, independent valuation firm to perform their 409A Valuation. We would of course be happy to help you with that.

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