Companies use 409A valuation to price their options for their employees. It means that the 409A valuation report will determine the common stock share price. Usually, this report is created by an independent third party to offer company 409A valuation services. To make sure that you get an accurate report which gives you safe harbor status, you will need to work with the right company.
What is a 409A Valuation Report?
The 409A Valuation report is a valuation prepared by an independent appraisal of the FMV (Fair Market Value) of a private company’s common stock. The 409A valuation allows the private company to obey section 409A of the IRS tax codes which regulate non-cash compensations. This 409A Valuation report is the conclusion of value of the total company’s value, which the share price is derived from.
409A Valuation Report Example
Apparently, there is no specific type sample 409A Valuation report which is used. Of course, every company has its own way of sharing information. The IRS did not give any specific guidelines about everything that a company 409A valuation report should hold, thus there is no sure kind of template. However, there are several main points which need to be included in the 409A valuation report, including the valuation, the methods used, and all about the company which helped the company reach the conclusion of value.
In other cases, there are also many companies who want to understand how their company compares to other companies in the industry. So, a 409A valuation is actually not just about getting the value of the company right now. It is also about considering the larger picture of the environment and the economy in which the company is operating, to assist in building an accurate picture of how much the company should be valued at this time.
What is Included in the 409A Valuation Report?
Here is a list of things that you must be included in a 409A valuation report:
- Summary of findings
In the 409A valuation report, this section will discuss the findings and present the value for the shares of common stock. Usually, this is the section which the company management cares most about. But the next sections are also important in making the IRC 409A valuation defensible when it’s audited.
- Overview of valuation
This section will display the details of the methods used for the valuation and also what the outcome was. Aside from that, this section will reveal the difference in each method, including income, asset, and market approaches’ output.
- Corporate history
This section will describe the company and its history. It will give all the details about its product offering, competition, market share, and future growth outlook.
Here are several points under this:
- About the company
This section will talk about the company’s history, and capital structure.
- Company products
This section will have the information regarding the products and services which the company offers.
This section will include the information of all the company’s competitions.
- Management and Ownership
This section will talk about the type of management that your company has. Also, it shares details on the equity structure of the company. Aside from that, in this section, you are also going to get details on the key employees and the management structure.
Here are several points under this section:
This section will talk about the management in the company and the key employees.
- Company ownership plans
This section will discuss any ownership plan or stock option plan specific to the company, or its key investments.
- Future Outlook
This section will talk about the future plan of the company and how it sees itself in the future.
- Capital structure
This section will assist you understand the capital structure of the company via tables and charts. You are able to see the various types of equity securities and classes which make up the company’s capital structure. Also, this section will include the company’s income statement and balance sheet.
- National economy
This section will talk about the national economy of the company and the company’s industry. It will show the output and effects of the industry on the economy and how the economy has changed in the last several years.
It is very important for the evaluator to give all the details about the industry and the product or service that the company offers. This is because this information is utilized to understand the leaders in the industry and what is the scope of the company in the industry. Also, it will help understanding the type of products and services that the market offers.
- Financial analysis
This section will give the financial analysis of the company using the historical income statements and balance sheet of the company as mentioned in the sections above. Also, it will include the common size financial statements compared to others in the industry.
- Other Sections
The other sections in the 409A Valuation report that you can come across include:
- Income Approach
In this section, a business is valued at the present value of its future earnings or cash flows. Also, this is used to get the final value of the company along with the values of the other methods.
- Market Approach
This market approach is a process where a value is assigned to a business based on the market forces in comparable situations.
- Asset Approach
This asset approach will examine the total value of the assets in your company.
- Capitalization Rate
The capitalization rate, or also known as cap rate, is utilized in the business world to indicate the rate of return which is expected to be generated on an investment.
This section usually includes the Discount for Control (DOC) in case of valuations for minority positions, or Discount for Lack of Marketability (DLOM) for private companies.
Well, the text above is an explanation about what a 409A Valuation Report is, a 409A Valuation report example, and what included in the 409A Valuation Report is. Read other articles to get more information about 409A Valuation.