The Tax Court recently issued its first reported opinion on IRC Sec. 409A, but although Slater v. Commissioner (T.C. Summary Opinion 2010-1) confirms the restrictive requirements of 409A, it doesn’t address the broader valuation and reporting concerns. Now a new survey of 800 CFOs of privately held, VC-backed companies by Lisa Davis, VP of Sales and Strategic Alliances at Aranca (New York), reveals the true, insomnia-inducing issues around 409A valuations, paramount among them: cost (big concern) and quality (surprisingly, not so much).
The common view of 409A valuations from this group?
- While 409A is simply a “compliance” issue – there is still perceived benefit from external analysis.
- A 409A valuation is considered a commodity service - and cost is of paramount importance to CFOs.
- Little if any value is derived from the report beyond the compliance checkmark.
In fact, one CFO blog recently voted 409A the Worst Tax of the Decade.“An amazing 67% of survey respondents single out cost as the key factor in making the decision to go forward with a 409A vendor,” writes Davis. Lest we kid ourselves, only 12% of respondents say that “quality” determines their choices. The majority of CFOs still see 409A as a “commodity service, [with] little value derived from the report beyond a compliance checkmark,” Davis says. In fact, the word “evil” was mentioned in 15% of the CFO responses (with only a few adding the qualifier “necessary.”)
A business opportunity for appraisers? “Although 409A is simply a ‘compliance’ issue, there is still perceived benefit from external analysis,” Davis concludes. The vendor’s “brand” may have little value to the CFOs surveyed (some even believe the analysis “is not difficult to do”), but the providers who balance cost and quality may find the best success in the early-stage and VC market. Davis’ complete survey on §409A Compliance: From the Perspective of the CFO is a provocative read for all 409A analysts—although we wouldn’t suggest it at bedtime. And if you believe that 409A work is in danger of becoming “commoditized” to the lowest-cost providers, email your thoughts and ideas for selling higher quality (and value) to the editor, and we’ll feature them in a future issue.
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