Frequently Asked Questions
Business Valuation FAQs
We certainly value quality over speed when it comes to something as important as a 409A valuation. Our standard answer to how fast we can provide a 409A valuation is ten (10) business days from when we receive the information we need from the client. We can get it done faster if we are told a specific date we need to hit (e.g. upcoming board meeting). The big caveat in there that many clients do not think about is the phrase, “from when we receive the information we need from the client.” Most clients have the information we request readily available. However, other clients have the information spread between various executives and their outside counsel. So if time is of the essence, getting everything together can speed things up tremendously.
This is dependent on the individual company and can vary widely. Our firm has the benefits of scale, technology, and excellent partners. By working with outsourced CFO services, cap table management services, and other partners we are able to cut significant time out of the process that most providers have to spend in the gathering and structuring of data. So although the price may vary depending on the individual situation, almost certainly companies will get the best possible price/value combination by working with Economics Partners either through our partners or directly.
The valuation process is dependent on the situation of the individual company. The general summary is that once a valuation service provider is engaged, the provider will need organizational, financial, and capital structure due diligence that most companies have fairly available without too much trouble. The most difficult tasks are typically either a long-term forecast of financial results or for very early stage companies an analysis of the cost to recreate the IP the company has created.
The information required can vary somewhat depending on the particular situation of a company. Below is a list of the items likely to be needed, along with the rationale for why they are needed and the situations in which they may or may not apply:
- You will need to select a valuation date
- Note 1: If your company has recently raised a round of equity financing, then the valuation date selected by many clients frequently coincides with the close date of that round
- Note 2: In the absence of a recently closed equity financing round, frequently clients chose the most recent month close for which they can provide financials
- Provide a Balance Sheet as of the selected valuation date
- Note 1: The Balance Sheet helps walk from Enterprise Value to Equity Value and is a key component of our financial due diligence.
- Provide Latest Twelve Month (“LTM”) operating results (Income Statement) as of the selected valuation date
- Note 1: Market-based valuation methodologies generally look at multiples relative to LTM operating results, so if comparable transactions or comparable public company analysis is being used then an LTM Income Statement is critical
- Provide your most recent three (3) calendar years of financials, including full year Income Statements, end-ofyear Balance Sheets, and ideally full year Statements of Cash Flows
- Note 1: Generally, these financials are not directly used in valuation metrics, but they are very important for Economics Partners to know our client and to use as a sanity check on projected financials if Discounted Cash Flow Analysis is being used in the valuation
- Note 2: Many earlier stage companies getting valuations do not have three (3) calendar years of results. But, companies should provide whatever they can since reviewing historical operating results is key for Economics Partners to know our client and to consider as we perform the valuation
- Provide five to ten years of projected operating results, along with expected capital expenditure needs, and what you believe any working capital demands may be to achieve the projections
- Note 1: This is so Economics Partners can perform Discounted Cash Flow (“DCF”) analysis. DCF analysis assumes the value of any asset is the present value of its expected future cash flows adjusted for risk
- Note 2: If the degree of uncertainty of future results is overly speculative and providing a forecast is not feasible, then DCF analysis will not be needed
- Note 3: This is probably the hardest item for companies to prepare as most do not have this readily available. We can discuss the feasibility and applicability of this analysis with you for your company
- Provide your most up-to-date Articles of Incorporation or Organization that reflect your current capital structure
- Note 1: This is used by Economics Partners to know everything we need to know about the features of the various types of securities in the capital stack
- Note 2: On multiple occasions we have received old Articles – Economics Partners needs the latest and greatest, or at the very least, needs to understand exactly what the features are of all securities in the capital stack
- Provide a detailed, up-to-date capital table that contains full detail of all classes of the company’s capital stock
- Provide full detail on the company’s option ledger, including the number of stock options currently outstanding, grant dates, and the strike prices at which they were issued
- Note: To some extent a summary table may suffice, but the more detail you can provide, the better
- If the company has any debt, provide term sheets or all key information about the debt
- Provide agreements or term sheets for any instruments convertible into equity
- If there have been any recent transactions (most recent twelve months) in the company’s stock, then provide all supporting information on those transactions
- Note: This includes not only equity capital raises but also any known secondary transactions in the company’s equity
- The most likely timing to an eventual liquidity event
- Note: This is your best estimate and is typically between one to five years
- Estimate the number of stock options you expect to issue over the next twelve months
- Note 1: This is used as part of the fully diluted share count per AICPA guidelines
- Note 2: This is another item that most companies do not have readily available, but providing your best estimate is needed
- Indicate if you intend to raise equity capital in the near-term (e.g. next quarter)
- Provide a company presentation, executive summary, or detailed business description to help Economics Partners know your company well and select appropriate comparable companies for their analysis
- Note: A kickoff phone call is also very helpful in discussing your company’s business model and understanding current and future revenue and cost structure
- Economics Partners will do our own research, but as the executives living your business every day, please provide what you feel are the most comparable public companies, and any recent M&A transactions of companies similar to yours of which you are aware
- Note: This is a big part of the work Economics Partners does, but your input as the ones living your business every day is very helpful and valuable
- Provide your corporate business address
- Provide contact information for your external legal counsel, if applicable
- Note: This can help Economics Partners confirm our understanding of any technical issues (e.g. unique warrants, liquidation structures, or other securities)
- Provide contact information for your audit firm, if applicable
- Note: This can help Economics Partners confirm in advance that your auditor agrees with judgments like the appropriate valuation methodologies to apply with your particular situation
- Provide details on any key items you feel impact the value of your business that may not have been captured in the other requested items
- Note 1: For example, your company may have created intellectual property value that is not captured on your balance sheet
- Note 2: Frequently for very early-stage pre-revenue or beta-revenue companies Economics Partners will work with a company to perform a Cost to Recreate Analysis that captures what it would cost to recreate intellectual property created by the company
- Provide detail on any previous valuations performed on the company
- Provide any additional thoughts you may have that may be important for Economics Partners to know as we perform your valuation (e.g. non-operating assets that might be undervalued on the balance sheet or threatened/pending litigation)
This may seem a bit overwhelming, but most of the above items are either readily available without additional work or can be quickly discussed as part of a kick-off call with Economics Partners (e.g. valuation date, exit horizon, estimated options to be issued, etc.). Economics Partners will assist in whatever way we can to make this data gathering process as simple as possible. Keep in mind that as with any analysis, the inputs are key to a quality output. The sooner Economics Partners gets this information, the faster you will receive your valuation.
By asking some simple questions you can hone in on the right valuation date for your company and specific set of circumstances.
- How soon do you need the valuation?
- What is the most recent period for which you can provide financials?
- If you are funding the business with venture investments, when did you close your most recent funding round?
If you are considering getting a valuation for a point in time more than a quarter in the rear view mirror, then legal counsel should be involved and approve of the decision to do a historical valuation. Generally they’ll base their advice on how formal and firm (in writing) grant commitments were. Some will advise against it entirely citing an “abundance of caution”. We are not here to provide legal or tax advice, but we can do a valuation for any point in time as long as your legal and tax counsel are on board. You should be aware that we have the benefit of hind sight, which will inform the conclusion.
While every divorce is complicated, those involving marital estates with closely held businesses are especially complex to dissolve and distribute. Because of the unique nature of every company, businesses are often one of the hardest asset to value in the marital estate, and without a prenuptial agreement, the business is considered subject to distribution upon divorce. There are basically three ways in which a couple can handle a business during a divorce: co-ownership, sell the business and divide the proceeds, or buy-out the other spouse’s interest. Economics Partners is an independent and qualified valuation and advisory firm that provides expert opinion and valuations for collaborative divorce settlements.
