Thursday, April 29, 2010
Due diligence in 409A valuation reports
I wanted to write this note because we are receiving projects/reports where lack of communications between appraisers and companies is leading to erroneous reports. In a 409A valuation report, the emphasis is always on due diligence and supportable data/conclusions and less on the tools to arrive at the final discounted value. It takes industry experience and an understanding of the risk factors to ask the right questions, document them and then weigh the various approaches that contribute to the final decision. Recently, a firm came to us with a report that was rejected by an audit firm. This firm had used outsourced analysts in a foreign country (visible from the way the report was written), who had not communicated properly with their clients and ended up using unjustifiable calculations. We had to redo the entire analysis and report and ask the right questions. In fact this firm does not take into account the post money valuations at all in their assessment of a firm's value, most probably because the overseas analysts probably did not know of such evidence. The irony is that this firm advertises widely on Google touting its discount pricing and use of overseas analysts. A review of their reports showed that they always used only one approach, going completely against the methods suggested in the AICPA practice guide. Further, their volatility calculations were arbitrary and lacked support. Forecast parameters were not validated against comparable peers' ratios. In one of their spreadsheets, the fair market value for common stock was pointing to the preferred stock cell. I would advise clients to exercise caution when procuring valuation services from companies that cannot defend them or cannot make available their principals for audit. If your auditor does not accept your valuation, you may end up having to get a new one done at additional cost. Today technology exists to provide affordable valuations using a fully staffed team in the US. We strongly recommend that US firms use US based appraisers for their valuation needs. Accuserve uses a fully staffed US team to provide valuation services, yet our costs are very comparable to companies that outsource them.