Category: 409A Valuations

Early-stage companies and high-growth businesses commonly backed by venture capitalists often attract and reward employees by issuing restricted stock or stock options to offer an appealing and competitive compensation package.

Compensation in restricted stock or via stock options enables early-stage companies to manage cash flow, attract and incentivize C-level executives and other key employees. The compensation strategy provides a reward for leaders, employees, and independent contractors to offset the inherent risks of working for a start-up. Individuals are incentivized to take a risk with potential sizeable payouts as the company grows and the value of the business increases.

Section 409A of the United State tax code affects companies who offer non-qualified deferred compensation plans including issuing stock options and compensating employees in stock. Compliance with Section 409A requires an objective party to prepare a 409A valuation to determine the value of the stock or exercised stock options to be reported as part of the recipient’s taxable income.

Background on Section 409A

Section 409A was added to the Internal Revenue Code effective January 1, 2005, under The American Jobs Creation Act of 2004. It was enacted partly in response to practices like those of Enron executives, who accelerated payments under their deferred compensation plans to access money before the company went bankrupt. The aim of 409A is to prevent improper deferrals of income for tax benefits.

409A Valuations – Process Matters; Industry Does Not.

Preparing a 409A valuation follows the same process and includes the same components of any detailed and objective business valuation that we develop. The commonly used term ‘409A valuation’ specifically refers to the reason for the business valuation: compliance with Section 409A of the tax code.

We have prepared 409A valuations for a wide variety of industries, and companies, including early stages to high growth; all privately held companies who continue to offer team members, often executive team and management levels, incentives to drive company growth and value.

As we often emphasize in our articles and messaging, industry has no effect on how a business valuation is prepared. We have developed 409A valuations for product and service companies, for companies paying executives in restricted stock, or companies issuing stock options to a broad level of employees multiple times within a year.

Many business valuation firms treat 409A valuations as being unique from business valuations prepared to allocate assets as part of a divorce settlement or for settling an estate or shareholder dispute. We do not. We readily prepare 409A valuations and honestly, enjoy the challenges inherent in developing comprehensive 409A valuations for venture capital-funded companies having complex capital structures including loans, warrants, and convertible loans.

We have a proven track record in developing valuations including 409A valuations that stand up to the highest scrutiny and present the supporting detail as to how and why the business valuation was determined.

Explanation of Timing – Multiple 409A Valuations in a Year

A comprehensive 409A valuation is required for each non-qualified, deferred compensation ‘event’. Events may be a hiring date, a quarterly grant commitment, or company milestone related. Merrimack Business Appraisers is often retained by the company to prepare the 409A valuation per event which can result in multiple valuations being prepared within a year, especially for companies who are on rapid growth trajectory and the number of shareholders and capital structure of the company if often changing.

Read this case study of issuing stock options multiple times in a year.

Conclusion

When you need a 409A valuation, it is important to hire an independent, objective business appraiser with proper appraisal certifications. Given the goal of a 409A valuation prepared is compliance with Section 409A of the tax code, it is important to make an informed business decision to avoid penalties and issues with the tax authorities. Retain a proven business valuation professional whose business is solely focused on business valuation preparation and has a proven track record.

Merrimack Business Appraisers has prepared many 409A valuations for our clients over the years. Our proven processes and track record offer our clients peace of mind that the 409A valuation is objective, defensible, and will stand up to scrutiny.

For leaders in startups and high-growth companies, peace of mind and confidence that they are compliant with tax authorities are highly valued.

When Values Matters.

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Knowing your strengths and playing to your strengths. This adage stands the test of time. While some may first think of an athlete and playing to their natural strengths, this adage rings true to honing our skills, expertise, and talents in any profession.

Successful People Surround Themselves with Talent

Going alone is a lonely journey and an undertaking where one will certainly come across challenges where one’s experience, knowledge, and capabilities will be lacking. Successful people tend to surround themselves with talented people, people who have other areas of expertise, backgrounds, perspectives, experiences, and specialties. I see this regularly with my clients, owners of privately held businesses.

My Clients’ Strengths

I have had the honor of preparing business valuations for thousands of businesses throughout my career. The variety by business model, organizational structure, revenue, and number of employees have varied tremendously. Some clients are faced with a shareholder dispute, need a business valuation as part of a divorce or estate settlement, or are selling all or part of the business. For many of my clients, their need for a business valuation is entering unfamiliar territory. It is completely understandable that they don’t know what to expect, how it works, and what it entails. For anyone, this is not a comfortable situation as most of us do not like being in a situation where we don’t know what we don’t know.

As part of our initial conversation, my prospective client may have a lot of questions or very few as they don’t know what to ask.

From appliance distributors to trade contractors to farmers to fisherman, manufacturers and professional services firms, my clients easily and readily highlight their strengths during our initial conversation. They can readily share with me the essence of their business, key drivers, market positioning, challenges, summarize their customer or client base and highlight top level opportunities. They don’t need a playbook or reference manual to speak with confidence and clarity about their business.

That is not surprising, right? They are, in most cases, doing what they have trained or were educated to do, having honed their skills and expertise to play to their strengths and be their own boss.

As business owners, they have leaned on their own strengths and in most cases surrounded themselves with other talented professionals to survive tough times, hold their own or grow, meet payroll, support the local economy, serve their customer base, and support their families.

Their strengths are naturally conveyed as they talk about their business with ease.

Evaluating Me as a Business Appraiser – Why Pick Me?

In most cases, a prospective client has been referred to me by someone they trust. I have worked with clients who found my website in an online search and do not know me from Adam.

So how does that play out when they evaluate me as the potential business valuation professional to help them in whatever situation they need the valuation for?

Simply, I play to my strengths in our conversation. I don’t have a script or a spiel. I answer their questions and explain how I work, how I charge, and what my proven process is. We have a casual, friendly conversation. I could have this conversation in my sleep as I am speaking about what I do every day and share what I have been doing for many years. I don’t veer off into other lanes. I am a certified business appraiser with the highest certifications available to best serve my clients. I am not a part-time accountant or CPA. This is what I do and all I do. I am a specialist and these are my strengths.

During this conversation, I am often asked, have you prepared a valuation for fill in the blank industry. I explain that my objective, detailed process is applied the same for valuing a farm as it is for valuing land full of minerals in North Dakota or for a rental shop in Hawaii. How I do what I do matters. But, neither the industry nor the trigger for needing the valuation (e.g., sale, shareholder dispute, divorce settlement) matters.

I am not selling during these initial conversations. I am explaining what I do and how I do it and confidently sharing my experience, the expertise I have and am offering that to privately held business owners to help them.

Conclusion

Playing to one’s strengths feels good. When we are in this mode, it feels like beast mode, we are confident, focused, and highly competent. We are not over our skis or outside our lane of expertise. We not only know what our strengths are, we are putting them to good use. We feel centered and confident, and intentions are on sharing our strengths for the benefit of others.

As a business owner, when you need a service such as a business appraisal, a service that may be new to you or unsure how to evaluate your options, it may feel like you don’t have the skills to effectively evaluate your options. I would propose that you have precisely the skills to evaluate a potential professional: Do you feel a sense of rapport? Do you trust the professional? Do they present their services clearly and logically? Do they answer your questions? Are they proven in their profession?

Owners of privately held businesses have many strengths to build on and that will serve them well in surrounding them with the right expertise to help them achieve their goals whether it is for marketing, sales, running operations, hiring an attorney, or securing a business appraisal professional. We are all best served playing to our strengths and when in doubt, rely on others you trust to bring their strong suits to the table.

For decades, I have honed my specialization in preparing detailed, thorough and objective business valuations. Over the years, I have appeared in court to explain the process, the rationale, and the logic to how I answer how the business valuation was determined and why the valuation is substantiated. I have been deposed, cross-examined, and questioned in detail about specific charts and tables in detailed valuation reports that are often over 100 pages in length.

Playing to our individual strengths feels good. Plus, at the end of the day, it is what helps others.

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