Any time there is a discussion about the funding in a company, it always turns into a topic on company valuation. Everyone wants to know the worth of a company, especially investors who are going to put money into the company. In fact, it is very important to get the value of the company, be it through a proper company valuation or using a business valuation calculator, when you are giving out common shares of the company or stock options. Every company needs to get their 409A valuation before giving out shares, to help them set the right fair market value for tax purposes.
If you have not yet got your company valued, then it might be time to check the value of your business. The valuation would help you, the owner, know the actual facts and figures that determine the value of your company. You will be able to understand all about how the market competition is, the income flow in the company and how many assets the business holds. In fact, this is an important piece of information that every company needs to have for each year.
What is a Business Valuation?
A business valuation is a simple process to obtain the economic value of a complete business or company unit. The valuation is used to get the fair market value of the company for many reasons such as taxation, establishing partner ownership, sale value, and even divorce proceedings. There are different kinds of business valuations, but one of the most common ones that companies need to adhere to is the 409A valuation. The IRC Section 409A states that companies who are about to issue their common shares or stock options need to get a third-party professional to value their business using IRS approved methods.
Why is a valuation important for a business?
Business valuations are needed mostly when the company is planning to sell a part or the whole company. With a business valuation calculator, the buyer and seller would be able to get the worth of the company easily.
In fact, when the valuation is done, it includes the analysis of the company’s management, its future earnings prospects, its capital structure, or the market value of its assets. The tools and methods used to get the final value always depends on the industry, business, and evaluator. But some of the common approaches include the market, income and asset-based valuation methods.
In addition to this, valuation is also important for tax reporting. The IRS requires companies to be valued as per its fair market value. In fact, some events like the gifting of shares, purchase of shares or sale of shares of the company need the business value as they will be taxed by the IRS. And the IRS uses the business valuation to ensure that the right amount of taxes are being paid.
Free Business Valuation Calculator
Eqvista’s business valuation calculator is free and can help you get the approximate value of your company. So, if you are wondering what your company is worth, all you need to do is visit this 409A valuation calculator and add your company details in the fields. Not sure how to use it? The next section will show you how.
How to use Eqvista’s free business valuation calculator?
Let us understand how to value a business using the business valuation calculator with an example. There is a company named Best Services Inc. It is a retail company and has been in business for the last 3 years. It is still an early-stage company and starting to grow.
Now the company decides to take a step ahead and for this they need to raise seed funding for the company. To do this, they need to get their company’s value so that they can then decide on how much they can get in funding for how many shares. We are assuming that the company has about 1,000,000 common shares.
Getting a bit deeper, let us say that the total revenue of the company for the last 3 years have been:
|Total Expenses (in 2020)||$150,000|
|Total Profit (in 2020)||$50,000|
With this rate, let us assume that the company would grow by 30% in the future as well. In addition, some other details of the company include:
|Company Assets (at the end of 2020)||Amount|
Now that all the details of the company are there with us, we can use this data and add in the Eqvista business valuation calculator.
From this, you will see the company’s value as the results below this in the form of graphs.
This is the first graph that you will be able to view. It will show you the company’s future forecast. As per the image, you can see that in 5 years, the company’s profit would increase to $142,805.00.
Below this graph is the graph that uses all three valuation methods to get the final value of the business.
To explain better, there are three valuation methods used here:
- Income approach: The value is based on the future discounted cash flows in the company. The business value using this method is $430,104.34.
- Asset approach: The value is based on the value of the underlying assets in the company. The business value through this method is $400,000.
- Market approach: The value is based on the comparable valuation multiples in the market. The business value through this method is $49,000.
These methods are then reconciled and the final value of the company is determined using this business valuation calculator:
- Total value: $293,034.78
- Price per share (common shares): $0.29
Getting the worth of your company is not only important for various actions, but also a good thing for founders. By knowing what your company is worth with the help of a business valuation calculator, you can easily know where you stand. It would help you decide on how far you want to take your company as well.
But other than this, a company should offer equity together with a 409A valuation done by a professional. So, answering your question:
When your company needs a 409a valuation?
As per the IRC (Internal Revenue Code), the 409A valuations have a validity of a maximum of 12 months or until another material event takes place in the company. A material event here is a process that can affect the company’s stock price. Examples of such events include a funding round. In fact, for a lot of startup companies, a qualified financing round is one of the most encountered material events. The qualified financing round can include a lot of things like the sale of preferred equity, common shares, or a convertible debt to an investor at a negotiated price.
Outside this, to determine if an event is a “material”, one varies from case to case. There are a lot of events that can take place such as divestitures, acquisitions, missing or exceeding financial projections, business model pivots, and the secondary sale of common stock. In case you are not sure when you need the 409A valuation, you can contact a professional to help you understand it better. Eqvista is here to help you.
All-in-all, to put it simply, you need a 409A valuation in the following situations:
- Before you issue your first common stock options
- Once every 12 months, or after a material event
- After raising a round of venture financing
- If you are approaching an IPO, merger, or acquisition
Get Audit Ready 409a Valuation Report for Your Company
It is advised that you do not use this business valuation calculator to get an official 409A valuation for your company. As per the IRS, it is vital that you hire a third-party professional to get the 409A valuation done. That is where Eqvista can help. We have an experienced team of certified professionals under the NACVA that can provide audit defensible 409A valuation. Learn more about our service here or contact us to know more!