The Real Costs of a 409A Valuation: Prices, Factors & Considerations
Whenever I’m helping to scope a private company common stock valuation (409A), the first question I get is, “How much is this going to cost us and how quickly can you be done?” It never fails. This question makes me a bit nostalgic and takes me back to the early days of 409A—when standard pricing was $20,000, a reasonable turnaround time was eight weeks, and review scrutiny was low because everyone was cracking the 409A code as they went. A snap back to reality tells us that none of this holds true today. A standard 409A valuation has become pretty commoditized for a number of reasons, and the scrutiny and consequences for “getting it wrong” have only gotten worse.
So, how do I answer the question of cost and timing today? Well, like with most things in life, it depends on the situation. While it’s unrealistic and even misleading to suggest there is a one-size-fits-all price for a 409A valuation, in this article I’m hoping to give you some tools and guidance for determining the best solution for your situation.
So, How Much Should a 409A Cost?
Well, how much should you pay for a cheeseburger? There’s a big difference in quality and price between a fast-food burger, an artisan pub burger, and a Kobe beef burger at Del Frisco’s (mmmmm). Essentially it all depends on what you want at the time. If you’re looking for the cheapest option to “check the box” on your hunger, you may spend a dollar for the value meal option. But if that burger decision has the potential to jeopardize your health with an E.coli scare, you’re probably willing to go upstream a bit. The same principles apply to the cost of a 409A valuation.
Be wary of online or “do-it-yourself” $1,999 pricing proposals. That said, you should be able to secure a solid analysis from a responsive, reputable firm without coughing up a huge fee. While an entry-level 409A valuation for a Seed-stage or Series A company can usually be accomplished for $5,000 or even less in some cases, where things go from there is anyone’s guess. You should expect the cost to increase as the business evolves and becomes more complex.
Yes, a simple analysis update adds efficiency and helps keep costs down, but major changes in the business or capitalization structure must be addressed properly. We also commonly see fees remain flat or decrease with subsequent valuations in situations where the company’s changes are minimal or the frequency of the valuations increase (e.g., quarterly).
It’s critical to understand what your exposure might be.
In any case, a fair and efficient valuation should be well thought out and based on the specific facts and circumstances. If your contact leads with a generic price proposal without learning about your business, plans for the next financing or exit, ownership structure, and the level of scrutiny the valuation will undergo, they may just be selling you the dream. Chances are, you’re in the wrong hands and your critical valuation probably won’t be done by that person, a credible valuation analyst, someone on this continent, or even a human! That’s right, while online software and low-cost solutions may seem cheap and fast, the lack of human interaction and consideration of your business issues certainly outweigh the (perceived) benefits of these subpar options.
Hiring a Valuation Expert
By asking your contact some hard questions, you should be able to shake out if you’re dealing with a technically competent valuation expert or simply a disconnected sales person. On the other side of the coin, some think the old idiom, “you get what you pay for,” holds true in the world of 409A. Be careful! This mentality could set your company up to get taken advantage of. But does your Series A-backed start-up need to hire a huge, global valuation firm that is still pricing 409A’s as if it were 2005? Probably not. You’ll never be a priority to them.
There is, however, a happy medium that will not expose your company to unnecessary headaches, now or down the road, without a ridiculous initial fee.
Many business owners see 409A valuations as a necessary evil of compliance. For some companies this may be true, but it’s important to think about who the reviewing audience could potentially be for that 409A report in the long-term. If your company has aggressive growth plans and/or is seeking a high profile liquidity event like an IPO or sale, your employee stock option grants will certainly draw heavy scrutiny.
Any exit where employees have in-the-money options will draw the eye of the IRS, SEC, and your auditors. More recently, we’re even seeing sophisticated corporate buyers policing old 409A reports and employee stock option compensation during transaction due diligence.
And Just How Long Should a 409A Valuation Take?
The typical turnaround time for a standard 409A valuation should be about two weeks from the receipt of all necessary client information. Sometimes the valuation needs to be expedited to meet pending deadlines, such as a board meeting or finalizing a key employee’s compensation package. Firms usually charge a premium for this (but seriously, you can’t get those new shoes you bought online tomorrow without paying for overnight shipping).
When choosing your 409A provider you also need to think about all the complex tax and accounting issues that could arise. And never sacrifice the quality of work for the sake of speedy delivery. That being said, a valuation firm with a depth of expertise and personnel will be able to cater to your distinct needs and timing demands.
Data collection is also a big part of the valuation timing equation. Compiling the information necessary to perform the valuation can be a time consuming effort for budding companies with young systems and processes. That’s why it’s important to select a valuation partner who understands your accounting systems and capitalization table management software.
Choosing the Right Valuation Advisor
Many development stage companies try to avoid the 409A process. We’ve heard it all: “My CPA says he’ll do the valuation for free”, “our financial sponsor says we don’t need a 409A because our common stock is worth what they just paid for the senior preferred shares”, or even the old, “my cousin took a valuation course in business school”. Our firm has a running joke that we talk ourselves out of more projects than we actually take. But truthfully, that’s what you should look for in a valuation provider.
You want a strategic partner that will listen to you, properly cater to your needs, and walk you through the best course of action in any given situation. What you don’t want is someone selling you something you don’t need, providing a report that won’t hold up under scrutiny or, worst of all, disappearing when you have questions and need to talk with an expert. You’ll also want a provider who can support your company when other valuation or transaction advisory issues turn up. If you go with the low cost, low service firm to perform your initial 409A valuations, they won’t be able to handle your more complex valuation needs, such as purchase accounting valuations, fairness opinions, or litigation matters.
There’s also a real opportunity cost here. You have a business to run and interviewing multiple valuation firms every six months is not a good use of time for any CEO, CFO, or Controller. From the very start, your company deserves a trusted valuation advisor that can see you all the way through to that billion dollar IPO (fingers crossed). Choose right the first time.
If you’re looking for more information on business valuations or just need some advice, contact us today.
Brent Glova is a Director at Vantage Point Advisors, Inc. He is a Certified Valuation Analyst (CVA) and a member of the National Association of Certified Valuators and Analysts (NACVA) with a strong background performing business valuations for share based compensation (IRC 409A and ASC 718), purchase price allocations (ASC 805), goodwill impairment testing (ASC 350), board advisory, and fairness opinions.