409(a) Business Valuation Requirements Can be Complicated

From Issuing options to Equity Compensation—We’ve got you covered

Get Value Right When it Counts

A 409a valuation or 409(a) is an important part of tax planning and employee compensation planning for any company thinking of issuing options or other equity-based compensation.

409(a) Explained

409(a) refers to the IRS Revenue Code section 409(a). Often referred to as a “non-qualified plan,” this section provides for certain taxes that are payable based upon the issuance of employee stock options or stock appreciation rights (SARs).

If the instrument has an exercise price less than the Fair Market Value (FMV) of the underlying stock as of the grant date could result in adverse tax consequences for the option recipient. The gain is subject to taxation at the time of option vesting rather than the date of exercise, with potentially devastating penalties and interest charges.

The consequences for noncompliance, which affect the individual who holds the options and not the issuing company, are significant.

Valuation for 409(a)

These issues can be mitigated by issuing options with an exercise price at FMV, and section 409A provides clear approaches on how to develop compliant policies. These safe harbors shift the burden of proof of noncompliance to the IRS. That simply means that if a company employs a safe harbor method to value the price of its stock options, the IRS must show that the company was grossly unreasonable in calculating the FMV.

If Section 409A applies to stock option grants because of the failure to meet the fair market value rule, there are adverse tax consequences for the option recipient (“grantee”) and tax withholding responsibilities for the granting entity (“company”). The grantee is taxed when the option vests rather than on the date of exercise, and there is an additional 20% tax as well as a potential increased interest charge.

By using a qualified third-party valuation, the company can shift the burden onto the IRS to prove that the option exercise price was not set at or above fair market value, or that the presumptive valuation method used was not reasonable. In all other cases, the company has the burden of proving that its stock valuation method was reasonable and complied with the regulations.

Tax Consequences

Failure to comply with 409(a) valuation requirements can have serious consequences. If you’ve already issued options or SAR’s without a valuation…contact us now

Get a thorough and accurate business valuation, tailored to your needs, in weeks—not months.

What Makes Us Different:

A Tailored Approach

Our process is focused on the belief that all valuation cases are different, and there is no “one-size-fits-all” rule for what factors we consider most important.

Efficient & Effective

We insist on running a tight valuation process to ensure a high-quality result. No surprise, but as a veteran-owned and operated company, we are also hugely geared towards discipline and efficiency.

15 Years of Experience​

For most entrepreneurs, their company is their largest asset. For over 15 years, entrepreneurs have entrusted our expert consultation on a wide range of valuation and sell-side M&A matters.

Tight Turnarounds

Our goal is to complete every valuation in two weeks. We make every effort to get work back out to our clients as soon as possible so that our valuation is not standing in the way of your progress.

Our Process

We insist on running a tight valuation process to ensure a high-quality result. No surprise, but as a veteran-owned and operated company, we are also hugely geared towards discipline and efficiency.

While each assignment is different, the following are the steps you can usually expect when working with us:

Data Request

The actual request will certainly vary from case to case, but the core data request is usually somewhat similar. Ideally we want to see a five year period of data, with three years being the usual minimum. 

Initital Analysis

Once we have data, our analyst team will conduct what we call a “first pass analysis.” We’ll start looking at trending in the data, looking for variances, unusual items, positive and negative trends, and financial ratios. We’ll likely send you a detail of questions that we will want to cover during the management interview related to the data provided.

Management Interview

To really understand the value of a company, we need to marry the narrative to the numbers. To get there, we’ll conduct an interview with the client to get an in-depth understanding of what drives the business.

Rinse & Repeat

Sometimes we get to this point and we are ready to push to the finish line. But in many (if not most) cases the management interview will uncover more questions and result in more requests. We iterate the first three steps until we have an adequate understanding of the company.

Analysis & Modeling

The appraiser will analyze the company's normalized financial statements, and use the most appropriate valuation method. To arrive at a final estimate of value, the appraiser will reconcile the values derived in each of the valuation methods and combine them with appropriate discounts.

Document Findings

When a final valuation conclusion has been reached and all relevant information has been considered, the valuation report is delivered to the client. We thoroughly explain the report to our clients and their advisers and answer any questions to ensure a thorough understanding of our conclusions. 

Brief Out

For most of our assignments we’ll conduct a brief out with our client. (In some cases this isn’t appropriate or necessary – think a “date of death” report for probate) For the most part, though, we feel that the brief out is the most important element of the entire engagement.

Ready to Get Started?

Getting started is easy! Our straightforward pricing is a flat fee for most situations and is driven by the scope of work on a project. We’ll get in touch to understand your requirements, provide a quote, and get docs out to get the ball rolling.

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Get a thorough and accurate business valuation, tailored to your needs, in weeks—not months.