Multidisciplinary Valuation and Corporate Advisory Firm Transparently Serving the Full Range of Attorneys, Asset Managers, CFOs, and CPAs TM
Alternative Investment Valuation and Financial Advisory Firm Transparently Serving the Full Range of Asset Managers, Attorneys, CFOs, and CPAsTM
Section 409A business enterprise valuations are rooted in this detailed section within the Internal Revenue Code.
Whereas ASC 718 for U.S. GAAP mandates equity compensation fair value be recorded as a compensation expense for financial reporting, 409A is the flip-side of this requirement from a tax perspective. IRS Section 409A states all firms with nonqualified deferred compensation plans should determine the fair market value of private company stock through a “reasonable applicable of a reasonable application of a reasonable valuation method.” Why is the IRS so concerned with the valuation of private stock lacking a market price? Simply put, the IRS seeks to tax “in the money” stock options for private firms today. The IRS feels “in the money” options are essentially deferred compensation innately pushed off to the future and hence not taxed at the present.
Fearful of lost taxes on today’s wages, the IRS mandated independent valuation opinions for private stock in 2004 by amending Section 409A. Private stock value is a key component of private option value. This is true irrespective of whether the Black-Scholes method or binomial method is used to value the private stock options.
An independent expert valuation of both private stock value and options serves two key purposes. First, an independent valuation of stock and options based thereon provides assurance that options are not “in-the money” and hence not taxable to the company. Option valuation methods have private common stock value as a key input into their models, so valuing private options starts with valuing a business enterprise’s common stock.
Secondly, the IRS has stated that an independent valuation provides safe harbor penalty protection against tax penalties should the IRS ever successfully challenge and overturn the Section 409 valuation. Our NAV team specializes in 409A assignments for our range of small and medium-sized corporate clients.
NAV's team deliver cost-effective and supportable valuation services. Section 409A assignments are often performed for growing firms issuing extensive employee stock options or incentive stock options. Option compensation is a leading form of employee compensation and retention for firms in either the technology, Internet, or healthcare industries. A large percentage of our 409 client base accordingly operates within the aforementioned industries.
We strive to deliver financial advisory blending diverse expertise and proven M&A records. Please reach out for more information on our full-range of 409A valuation advisory services.