Situation
This company was founded by a young, entrepreneurial group who sought to make Wi-Fi accessible to people in a wide variety of locations. Wi-Fi was an emerging technology at the time, and this group had developed a model to roll out Wi-Fi access for public and nonpublic places including the billing model for the provider to charge for access.
Their industry model included hotel chains, airports, and shopping malls.
The founders had developed a thorough business plan including detailed financial forecasts and needed 409A business valuations as compensation packages included stock options to attract and retain talent. They were referred to Merrimack Business Appraisers to be their business valuation resource as needed to support their rapid growth.
Merrimack Business Appraisers’ Approach
Lou Pereira, a Certified Business Appraiser, of which there are fewer than 12 throughout New England, thoroughly enjoys developing 409A business valuations. As was the case with this company, the business is often an emerging business, on a fast track for growth that needs the 409A business valuation to incentivize top performers to join the business and be integral in its success. In this case, Wi-Fi was an emerging technology and the marketing opportunity for growth (as we now fully understand) was tremendous.
While some valuation professionals do not want the added scrutiny of the Department of Labor, Pereira applies his proven business valuation development process that presents how and why the business valuation was determined. He is confident in his work standing up to rigorous scrutiny including the IRS and in the case of 409A valuations, the Department of Labor.
Valuation Outcome
Lou Pereira developed multiple 409A business valuations for the leaders of this Wi-Fi business as they hired people, and the compensation package included stock options. Each 409A business valuation calculated the value of the business at the time and set the strike price of the stock options. In periods of rapid growth, Pereira prepared multiple valuations in a year and as growth rates settled down, annual 409A business valuations became the norm as stock options were an integral part of key performers’ compensation packages.
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Situation
A medical professional was planning his exit strategy and developed a business model to offer support of both front- and back-end operations for other medical professionals in his same line of work. The business offered each medical professional the opportunity to become a partner in the business and the business would manage all scheduling, HR-related functions and handle all the billing and time-consuming work between insurance companies to submit and negotiate claims.
To enable rapid growth, the founder hired a CFO and COO for the company. As is common with start-ups, the business lacked cash but attracting senior talent to build the business and scale operations demanded that compensation packages included stock. For the CFO and COO, restricted stock was offered.
To calculate the value of the restricted stock as part of each C-level employee’s compensation, a 409A business valuation was required by the Department of Labor. The founder was referred to Lou Pereira at Merrimack Business Appraisers to prepare the 409A valuations.
Merrimack Business Appraisers’ Approach
Pereira enjoys preparing 409A business valuations as the underlying need for the valuation is fueled by high growth companies who are incorporating stock options or in this case, restricted stock, into compensation packages to attract, incentivize, and maintain top talent who are integral to the business’ success.
Initially, Pereira developed the 409A business valuation to determine the value of the restricted stock being offered to the COO and CFO. As more ‘partners’ joined the company to have their medical practice’s front and back end managed by this business, their fractional ownership as a new partner was calculated via a 409A valuation at the time of their joining.
Valuation Outcome
Over the years, Pereira prepared many 409A business valuations as required to properly value the restricted stock granted to leadership and new owners in the business as the medical practice consolidator model rapidly grew on both coasts.
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Situation
A bright and ambitious college student started working in the medical device and development sector while in college to make some money in a sales role. After college, he worked as a consultant for a medical device manufacturer, continuing to learn the business and industry.
He launched his own business selling a medical device he developed targeting health practitioners of patients with a specific medical condition. His knowledge of the industry and his natural ability to build relationships propelled the business to significant growth within five years.
The entrepreneur had an employee who was instrumental in the success of the business and he wanted to reward him with equity in the business. He was advised that to do this he needed to comply with Section 409A of the United State Tax Code affecting businesses who offer non-qualified deferred compensation plans including issuing stock options and compensating employees in stock. To be compliant he would need a business valuation and would need a professional who had the expertise in 409A valuations. Through an online search he found Merrimack Business Appraisers and President, Lou Pereira.
Merrimack Business Appraisers’ Approach
Pereira was impressed by this entrepreneur and the successful medical device business he had built. As a certified business appraiser, Pereira commonly prepares business valuations for tax related needs including 409A valuations required for tax compliance.
As a business valuation professional, Pereira developed a thorough and objective business valuation of the medical device company based in Massachusetts. He then applied the required discounting to account for lack of control and marketability of the equity being granted as restricted stock to the employee.
Valuation Outcome
As an objective party, the valuation completed by Merrimack Business Appraisers satisfied compliance with Section 409A of the US Tax Code determining the value of the restricted stock to be reported as part of the employee (the recipient’s) taxable income. The entrepreneur was able to reward his employee with stock in the growing business and have peace of mind that he was in compliance with Section 409A.
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Situation
This early stage Internet of Things (IoT) developer was rolling out its infrastructure as a significant milestone in launching its business. At this important phase, the executives wanted to issue stock options to attract talent and incentivize key employees.
The CFO reached out to Lou Pereira, President of Merrimack Business Appraisers, to have Pereira prepare 409A valuations. The CFO knew Pereira from a previous employer for whom Pereira had conducted 409A valuations.
Merrimack Business Appraisers’ Approach
Unlike many business appraisers who do not prepare 409A valuations, Pereira enjoys the nuances and challenges of working with early-stage companies having complex capital structures. In such situations, as was true for this IoT developer, the capital structure of the company was changing regularly as stock options were issued changing the number of stockholders and capital composition of the company. With varied, blended investments enabling the rapid growth, there is a level of complexity that makes the 409A valuations both interesting and challenging.
Each time the company issued stock options, which was multiple times in a year, Pereira would issue a comprehensive 409A valuation to reflect the latest capital structure and valuation of the issued stock options.
Valuation Outcome
This high-growth company was successful in attracting talent and incentivizing its key employees while being compliant with the tax authorities as Merrimack Business Appraisers prepared comprehensive 409A valuations as needed when stock options were issued.
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