What is a 409A Valuation?

Mar 23, 2023

409A valuation

For a variety of reasons, business owners need to obtain a valuation of their company’s shares from time to time. But this is especially the case if your company offers employee stock options. Since the early 2000’s, after the Enron debacle, the IRS began requiring companies that offer stock options to conduct a 409A valuation of the company’s equity, and thus the options, on at least an annual basis.

Why Should You Obtain an Independent 409A Valuation?

While a company can conduct that valuation on its own, it subjects itself to much greater risk and liability than if it retains an outside advisor to conduct the valuation. When relying on an independent party for the valuation, the company can point to the 409A valuation and show the IRS that someone else made the assessment of what the common stock of a company is worth. This is called a “safe harbor” that is presumed reasonable by the IRS, which then allows companies to moderate that risk of potential noncompliance.
Making sure that your company has regular 409A independent valuations in its books and records especially helps when it is time to sell the company. Your compliance with the IRS code will be an important due diligence point in the sale of your company and a matter that will need to be corrected before a sale can close if compliance is not sufficient.
In fact, we were once engaged to complete several 409A valuations during a sales process because the seller had conducted its own 409A valuations. The buyer found that the original valuations were flawed, having been conducted internally, so TOBIN was retained to clean up the matter before the transaction could close.

Why You Should Choose TOBIN for Your 409A Valuation

Some business owners elect to establish the valuation of their shares by using their tax accountant. However, our clients prefer an investment bank like TOBIN because they believe their valuation will be more credible, and correct, if conducted by professionals who operate in the mergers and acquisitions world every single day. And we agree.
Tobin & Company has conducted company valuations for 22 years. Over that time, we’ve seen it all, and we know what your prospective buyers, and the IRS, look for when determining if your 409A compliance requirements are sufficiently met.

If you’re in need of a 409A valuation, or if you just have questions about the process, call us. We’ll answer your questions, ask a few as well, and then let you know if we’re a good fit for you.

Warm regards,

Justine Signature

Justine Tobin
(704) 334-2772

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