What is a 409A Valuation?
FE International’s 409A Valuation Service offers an appraisal of the fair market value of your company’s common stock. Our report offers a detailed, comprehensive and insightful appraisal, with thorough analysis and reporting, avoiding the use of overly simplified 409A Valuation calculators. As the principal tool for navigating a lucrative and successful sale, a valuation will need to be reliable. However, compared to other business models, reliable valuations for online businesses can be hard to obtain. This is particularly true for mid-market businesses. SaaS, e-Commerce and content websites and apps tend not to have physical assets, and the value placed on their traffic, technology, and growth potential can be difficult to quantify.
To complicate matters further, valuations offered by various brokerages and valuation services are often unreliable. Hundreds of business valuation tools are listed by Google but most of them provide wildly inaccurate and varying results. These tools do not take into account the range of valuation drivers required for estimating an online business’s true value, which is why many companies turn to traditional accountancy firms and banks when they require a 409A valuation. Unfortunately, these firms’ services are often impractical for many small to medium-sized businesses, due to fees and eligibility issues.
FE International’s 409A Service aims to address these problems with an expert and reliable solution, utilizing hard data and over a decade of industry experience. It aims to avoid the use of simple valuation calculators in favor of an in-depth, tailor-made approach. Below, we will outline our valuation process and provide an overview of our reporting methods.
FE International has considered three key scenarios where our valuation and reporting services may be deployed:
1. Speculative Exit Planning & Strategy Planning
Speculative Exit Planning
Many business owners may not be looking to sell their company but could benefit from a valuation for planning purposes. Not only business owners can benefit from valuation reports, but CEOs and senior management can benefit from a better understanding of the business’ prospects and market value.
Getting a valuation for your business can be a tense moment for a business owner. After years of hard work, a valuation might determine if the owner can exit and start a new business, retire, or if they might need to continue working to bring the business to fruition. This could be a key moment in a business owner’s life and they should not hesitate to pursue a valuation if it could help answer some pressing questions.
FE International has helped hundreds of business owners better plan for their futures by offering comprehensive valuations. Timing the sale of your business will be important, and the advice offered in our report will help you to judge how best to maximize your business’ value. This could mean continuing to operate your business for a defined period to improve your financial record, or it could mean selling the business to take advantage of the current M&A climate.
FE International also offers advice on how best to approach an exit from an operational standpoint. A selection of considerations include:
- Employee retention and how to best inform employees of an exit
- Key-man risk
- The transfer of physical assets
- Geographical responsibilities
- Buyer due diligence
Another scenario where a business valuation might be of use is in the strategic planning for the following few years of operation. A full assessment of the business’s current market value can guide the best approach to raising capital for the business, making investments and acquisitions, how to market and brand the business, and maybe even how best to plan for an IPO. Discussion of exit strategy will not be relevant to most of these scenarios, and the kind of report produced will need to address the unique strategic questions your business is facing.
By looking at your business’s strengths, weaknesses, and risks, a full valuation report can give business owners an idea of how best to maximize value before undertaking any of the above activities.
Raising capital: Most entrepreneurs and business leaders will be familiar with the rigors of raising capital, even if they have never gone through the process themselves. Many business owners spend large amounts of their valuable time raising capital, and the results of this work can dictate the future success of their business. It is essential to enter these negotiations with a thorough knowledge of how your business would currently fare on the market. Armed with this knowledge, and an understanding of what your business’s weaknesses are, you will be able to address the concerns of potential investors and better promote your business’s strengths. Investors will often want to see detailed financial reports and tax returns, and a higher valuation (clearly substantiated and explained by FE’s 409A Valuation Service) may offset any concerns brought about by financial anomalies or operational concerns.
Investing in another business: When a business invests in another business as a growth strategy, for tax purposes or for any other reason, the true value of the business for sale will need to be carefully assessed (see Buyer-side Consulting below). However, understanding the impact of an acquisition on the acquiring business’s side, and what the new, larger business will likely be valued at, could also impact a decision to buy. This is especially true if an acquisition is made using stock as well as cash.
When planning for the future success of your business, a full understanding of the business’s value, strengths, and weaknesses could prove invaluable. If you would like to discuss strategic planning with our team, and what a full 409A report could do for your company, feel free to contact us by phone or email.
2. Selling Privately & Partner Buyouts
FE International takes great pride in our ability to find buyers for online businesses. We have an extensive network of qualified buyers (currently 53,000+) but not everyone who comes to us needs to make use of this network.
We currently offer discounted brokerage services to business owners who have already located an appropriate buyer. If they have already begun their exit process and do not require our wider range of services, we can provide our valuation services and 409A report for a set fee.
Our report will help to guide and support your negotiations process and make clear to a prospective buyer what a fair offer price should be.
Partners buying out other partners is something we have seen more frequently over the past twelve months. Due to the proliferation of online business models and better available resources and advisory services for buyout situations, more partial owners of online businesses are seeing buyouts as a convenient way to exit a business or consolidate ownership.
Buyouts can have some advantages over a purchase from a third party, as the partner acquiring one’s shares will already know the business well. One issue acquisitions often face is a lack of acumen in a potential buyer. Every business has its own complexities and requisite management skills, and the higher this barrier, the lower a business valuation is likely to be. An acquisition made by a partner can, therefore, be desirable.
From the buyer’s perspective, they will already have a good understanding of what it is they are investing in. The valuation provided in this scenario will act as a guide for both parties when settling on a fair asking price for the exiting partner’s shares. It is common in buyout scenarios for both relevant parties to come up with their own figure for a valuation, and then take an average between these numbers. When this fails to satisfy either partner, a valuation from a third party is an ideal way to break the deadlock. An impartial and reputable valuation service can help to readjust the expectations of either party.
It is important that the working contributions of the exiting partner is taken into account when building a valuation. If a partner’s exit is likely to have a negative impact on growth or revenues in the long term, this should be factored into the valuation.
It is also important to check the initial partnership agreement to see if it outlined a buy-sell agreement. This agreement will often contain conditions for any buyout and could help to reduce any potential friction.
If you are considering a buyout and you require a valuation from a trusted third party, or you are unsure about any of the details mentioned above, feel free to contact FE International to discuss your unique situation.
3. Buyer-Side Consulting
Confirming a fair asking price
If you have found a business you are interested in investing in, you may want a second opinion on their asking price before you proceed with the acquisition. An acquisition can be a nerve-wracking experience, as many businesses will inflate their valuations in the hope that prospective buyers fail to notice discrepancies in their financial records. FE International can perform due diligence on a business’s financials, as well as any other information that is public or has been submitted to the buyer. This process can provide an objective valuation based both on years of accumulated knowledge and our own industry benchmarks.
One of the key problems with creating accurate valuations for mid-sized online businesses is the lack of available data for similar acquisitions. Looking at precedent transactions within your industry is one of the key pillars for building accurate valuations, but a solo investor may struggle to find this data. Most private business sales will not make their ultimate sale price public, let alone their financial records and operational history. A reputable M&A firm will have hundreds of precedent transactions to draw from when creating valuations. They may have valued and sold businesses that are similar to one their client might be considering buying. Making use of their expertise could help a prospective investor to proceed with confidence, or to avoid a poor investment.
Determining valuation drivers
There are some other useful considerations when considering a professional valuation in this scenario. A professional valuation is likely to provide a good indication of where to focus your efforts post-acquisition. It will expose the most important valuation drivers for a given business, allowing a new owner to focus their efforts on work that will quickly increase the value of their new asset. Some business owners will provide a report on their business’s future growth potential, and suggestions for future growth tactics before they sell on their business. If the growth strategy for a new acquisition seems at all unclear, then a valuation report could illuminate the most appropriate path forward.
Other reasons for considering a 409A Valuation:
The three scenarios above represent some important reasons to consider an in-depth business valuation, but there are many other reasons to seek a valuation. Some examples include:
- Determining share values for an Employee Stock Ownership Plan (ESOP) and for shareholder meetings
- To resolve shareholder or partner disputes
- For estate tax reporting purposes
- For gift planning purposes
- For determining asset value for the benefit of divorce proceedings
- For valuing a business for bankruptcy purposes
- For determining whether a business is growing, stagnating, or declining
How We Build Our Valuations
To create an accurate valuation for an online business we start by having the business owner complete a thorough questionnaire that will provide much of the information we need to make an informed assessment of the business’s financials, web traffic, and operational history. Below we will provide an overview of the information requested in our questionnaire. (These questions are subject to change as we develop our due diligence process, so the information below is for illustrative purposes only.)
In this section, we get an overview of the business owner(s), the documentation they are willing to provide, their background and the background of the business. We also ask about the business’s competitors and the motivations behind the appraisal.
This section helps us identify efficient and lucrative avenues for future growth. We hope to discover the major product and financial milestones as well as what strategies have worked so far for scaling the business. There is also an opportunity for the current business owner to give their opinion on how best to continue growing the business. FE International will combine these ideas with our own experience to build a clear impression of where a new owner should direct their efforts.
In this section, we learn about what it takes to operate the business in question. This is essential for determining an accurate valuation. A business that requires less owner oversight will often get a higher valuation than one that requires more dedicated work, so an understanding of staffing requirements will be useful for any prospective owner.
Understanding the different products and services that the business offers, who the ideal customers are, and where these products are sold and promoted will be important considerations during a valuation. Having fewer products and services can sometimes present a greater risk to a business as they are less likely to adapt to changes in their market. This being said, the success of these products and services and the quality of any software products’ code and documentation will also be taken into account.
Internal Security Questions
To build an accurate valuation, security features, historical security breaches, and major bug fixes will need to be taken into account.
Without an understanding of the current marketing practices of a business, it can be hard to determine the business’s true potential. Many prospective business owners will have some background in marketing and may have their own ideas about how to grow the business. By gathering data on the current marketing budget, what the key marketing strategies are, and whether relevant accounts can be easily transferred to a new owner, we can gauge the impact of the current marketing practices on the business’s revenue. This process can also alert us to some risks — for example, some businesses may be overly reliant on paid advertising
Some questions about the company’s accounting, payment processors, proffered currency for transactions, refund procedures, and payment increments will appear in this section.
Metrics on Subscriptions, Customer Acquisition Cost, and Repeat Customers
Here we gather information on the number of customers, their churn or repeat rate, CLV, acquisition cost and more.
Finally, we ask about the traffic to the website or app. By looking into the main traffic sources, backlink profile, seasonality, and any Google penalties, we can put together an impression of the quality of traffic and what it might take to sustain or grow it.
Our 409A Valuation Reports
Our comprehensive reports do not just provide you with a business valuation, but with an assessment of our findings with a clear explanation of how we came to our conclusion.
Below, we outline the broad structure of our reports.
(The content of these reports will be subject to change, so this information is provided for illustrative purposes only.)
The high-level structure of the report:
- Notes of Findings
- Valuation Methodologies
The Overview features an executive summary along with the Revenue Overview and Key Valuation Metrics. It’s worth bearing in mind that our valuation reports are not necessarily just for the benefit of our clients but can also be used to inform third parties, including potential buyers of the business about the business’s current status. This overview section will allow anyone to quickly understand the core functions of the business, what the business’ unique proposition is, and how the business has performed over time.
For the Financials section we tend to display a 12-month income statement (cash or accrual) along with charts displaying core metrics we believe should be prominent in a sales pitch for the business or when summarizing current performance.
In the Notes and Findings section we provide analysis on the business’s financial record, cost structure, core financial metrics and growth and draw attention to any anomalies that could affect a valuation.
In our Valuations Methodology section, you can gain an insight into how your chosen business is valued. We explain the Discounted Cashflow Model, Comparative Multiples, The Revenue Multiple/Revenue Regression method, and the Price Regression model and how these models affect your valuation. Having some grounding in how online businesses are valued will help business owners to better understand their business’s marketability.
In the report’s Summary, we bring together all the above information to present your individual results for each of the valuation methodologies along with your Valuation Conclusion. Our conclusion makes a few key assumptions, which are listed, including that the business receives a majority cash-up-front offer, and attracts multiple qualified offers.
NB: Business valuations created by FE International, or any other M&A advisor, will only be as accurate as the information that is provided during due diligence.
The turnaround time of a valuation report can vary, depending on the data we receive and the nature of the business. Once the report is delivered to our clients, FE International is happy to discuss any queries they might have.