You may be facing the less-than-exciting prospect of needing a 409A valuation to comply with the IRS’ deferred compensation requirements. Since the introduction of the requirement it has become the standard not only for pricing stock options but also for pricing profits interests within LLCs. When this need comes up you should be armed with the ability to recognize what would lead to a crappy 409A that might end up exacerbating your pain. Below is a quick hit list of what makes for a good versus a crappy 409A:

  • First, you should not overpay. Some valuation firms will give the quality pitch while trying to charge an arm and a leg. They will warn you of the all-in cost of a “cheap” valuation – THEY ARE ABSOLUTELY RIGHT, however, there are high quality valuation firms out there that produce work on par or better than the expensive shops for a great value. You will want to work with one of these shops that offer a great value
  • Avoid shops that have questionable qualifications
  • Ask for references
  • Avoid shops that offshore their valuations
  • Turnaround time should be fairly quick
  • They should involve you in vetting their assumptions – they can’t possibly know your business in a short window better than you know it – you should have input
  • They should follow AICPA and USPAP standards
  • They should really understand your business model

The downside of a crappy 409A valuation can be significant. A wrong price can be very expensive in the long term. In the short term it could prolong audit or require rework which both will cost more than any savings you thought you might get from a cheap 409A. So to avoid a crappy 409A valuation, work through the hit list and make sure you get someone who will take good care of you – I happen to know one.