What Is The Need For 409a Valuation

If you are a business owner, you will be surely having a fair idea about the value of your enterprise or company. Since you live and breathe in your company, you will be very confident that you are totally aware of the value of the company. Although this is true for most cases, there are times where business owners are clouded with the valuation of the company.

For conducting the valuation, companies generally seek professional services because there are many things that need to be looked into during the process of valuation. There are many misconceptions around the valuation of the company, especially for the 409a Valuation. The section 409a typically applies to companies that issue traditional and non-traditional deferred compensation to their employees. These compensations include employment agreements, offer letters, stock options, bonus plans, stock units and other kinds of agreements.

If your company if giving any other form of deferred compensation to the employees, then you should immediately seek expert advice. These valuation experts will provide you a clear picture of the fair market value of your business organization. There are three main approaches that the valuation experts are likely to employ—they are—asset, market and income approaches. These three approaches will help the valuation expert to reach the enterprise value in a very short span of time. By and large, there are three methods for evaluating companies, which are option-pricing method, current value method and the probability-weighted return method.

You need to keep in mind that all company valuators may not be in the right position to do the 409a Valuation. Valuation services that don’t have experience in 409a Valuation may land up undervaluing or overvaluing your company. This can have a severe repercussion on the company – especially when you want to sell your company.

In addition to hiring an independent third-party valuation expert, you have two other ways in which you can get your company valuated. In the first instance, your board of directors can find out the fair market value. In the second instance, the CEO or the CFO can process a 409A valuation with the help of in-house experts.

If you have good financial experts in your company, then you can take up the company’s valuation in-house. This will also save a lot of money for the company. There are several times in the year where in-house experts are free and they can take up the valuation work. The CEO or the CFO will have to allocate time and budget for the valuation process. If you have never done a 409a Valuation before, you will have to evaluate the valuation services first. First, you will have to look at the cost of valuation. Then you will have to look at the competency. Once these two parameters are checked out, you will have to look at the class and the customer service factors as well. When you get confirmation that the valuation firm has experience and expertise in the field of valuation, you can allocate the work to them.

Categorized as Finance