409A Valuation Report Template

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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