What's the difference between a company's 409A valuation and its Fair Market Value? - Quora

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What's the difference between a company's 409A valuation and its Fair Market Value?
Is there any?

Bo Brustkern, Founder of Arcstone Partners, a natio...
Founder of Arcstone Partners, a nationally well-respected valuation boutique. My firm has conducted hundreds of 409A-compliant valuations throughout the United States, with an emphasis on tech companies. 409A Valuations
409A employs the standard of value known as "Fair Market Value" according to Revenue Ruling 59-60. In other words, there is no difference between the "409A value" and "Fair Market Value." This is theoretically sound.

However, there may be cases (I would argue many cases) where a company's "409A value" was improperly calculated and therefore not an accurate reflection of its Fair Market Value. So, while the idea that 409A=FMV may theoretically be true, the fact is that there are a lot of lame 409A providers out there that are not actually valuing companies at their true FMV. This is a sad fact.

Right? Many companies employ the services of third-party firms to perform valuations for 409A. The theory is that an independent appraisal offers the most effective protection. However, identifying professionals competent to render accurate 409A valuations remains difficult -- more difficult than, say, identifying low-cost providers in the space.

Over the years, legislation has tightened the definition of what constitutes a qualified appraiser. The current set of standards include the following:

* Regular performance of appraisals for which the individual receives compensation;
* Demonstration of education and experience in valuing the type of entity subject to the appraisal;
* An appraisal designation from a recognized professional appraiser organization.

In the end, there are two key pieces relevant to 409A compliance: appraiser and appraisal. Clearly, not only is it important to use reputable, qualified appraisers, but it is also critical that such professionals follow generally accepted valuation standards to craft robust appraisal reports. Without both, you are not fully protected from the perils and pitfalls of noncompliance with 409A.
Thu Nov 25 2010 21:12:07 GMT-0800 (PST)