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How do I determine the fair market value of my company?

Answers

Peter Rennard
Title: Principal
Company: SBR Group
(Principal, SBR Group) |

If your purpose is to determine what you could sell your company for, I recommend you familiarize yourself with a concept known as "Willing Buyer, Willing Seller" (WBWS). This approach is not a statutory one (divorce, ESOP, 409A, etc.) but is driven by the assumption that the buyer has a certain expectation for a return on his/her investment and you as a seller have a certain expectation for a selling price. Through an iterative process the optimal solution can be obtained for both the buyer and seller. Returns on investments and selling prices can be adjusted within limits, but the buyer and seller both have certain expectations. If the optimal solution is unacceptable to either buyer or seller, the deal fails accordingly. Otherwise, the transaction proceeds.

This approach drives straight through to the transaction itself allowing total visibility for both buyer and seller.

Peter Rennard
SBR Group
sbrgroupllc.com

Topic Expert
Peter Freeman
Title: Chairperson - Clean Tech Committee
Company: Keiretsu Forum - Angel Investors
(Chairperson - Clean Tech Committee, Keiretsu Forum - Angel Investors) |

The first reply is good, conceptually.

I will say "it depends" on the purpose or reason for the valuation. If it is for statutory purposes, such as 490A, then you need to hire an outside expert. Another useful resource is the AICPA Guide to valuing private companies.

If there is another purpose, such as a potential sale, you can use the same methodology, but recognize that the process is far more art than science. And would require a much lengthier discussion.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

I agree with Peter - it really does depend upon the purpose for the valuation. If one of the reasons is to set an FMV for the purpose of calculating the value of equity compensation awards, IRC 409A allows the board to use its own criteria to set the value, however this method does not provide a safe harbor and in an audit situation it would be the company's obligation to defend its valuation method. IRC 409A does establish an independent outside valuation as one of the safe harbor methods of setting the FMV and in an audit situation where an independent valuation has been performed the obligation would be upon the IRS to refute the methodology - a higher burden which the IRS is not generally wont to pursut as vigorously as when the onus is on the company.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

While you can perform your own valuation for 409A I have found that Boards prefer to use an outside firm. These valuations are used to set the price for granting stock options and need to be updated regularly as significant events occur that would influence the valuation (such as a new round of funding, new product introductions etc). The cost depends on how many rounds of funding you have had as these rounds are taken into account as one factor in building up the valuation. If you are looking for firms in your area you might want to ask your audit firm as they will need to approve of the valuation.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Valuations are generally conducted with a specific purpose in mind, usually either a 409A valuation to support the issuance of stock options at fair market value, or to establish a basis for pricing in an M&A transaction. Generally, a company is looking for the option valuation to be at the low end of a valuation range and the M&A valuation to be at the higher end.

I was involved in a situation where a company had engaged a professional valuer to conduct a 409A valuation for their annual option grant program, then at the last minute, they received an expression of interest from a potential acquiror and cancelled their planned 409A valuation because they feared this might prejudice the valuation they could negotiate in an arms length M&A transaction.

I find it somewhat hard to believe that a 409A valuation performed in isolation for the sole purpose to an option grant program could be seen as a basis for setting the M&A valuation, but I would like to know what experience others have in contemporaneous valuations done for different purposes.

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