Business Valuation for Sale, ESOP and 409A

An auditor-defensible valuation has six things:

• 1. Methodology aligned with internationally accepted valuation standards — applicable framework stated in the methodology section
• 2. Comparable analysis from professional databases — Capital IQ, S&P, PitchBook, or Bloomberg — with data extracts preserved and dated
• 3. Discount rate from observable market inputs — risk-free rate, equity risk premium, comparable beta, size premium — all sourced
• 4. Terminal value bounded — by long-run GDP, disclosed as a percentage of total value
• 5. Every assumption with a written rationale — independently testable by a reviewer
• 6. Report structure that follows audit expectations — methodology, comparable rationale, sensitivity tables, conclusion of value

Valuations missing any of these will face audit queries. Valuations covering all six give a reviewer far less to query. More about our team →

Four practical tests that work regardless of who you’re evaluating:

• Ask which internationally accepted valuation standards their valuations follow and request a sample report to inspect the methodology section.
• Ask which professional databases they use for comparable company and precedent transaction analysis. Capital IQ, S&P, PitchBook, and Bloomberg are the standard. Free internet comparables are not.
• For 409A valuations, ask whether any of their 409A reports has been challenged on IRS examination, and how that ended — and whether their reports are structured to support Section 409A safe harbour.
• Ask whether their valuations have been reviewed by audit firms — and how those reviews resolved.

Most valuation providers cannot pass all five. We welcome every one of these tests in our discovery process. Book a free 30-minute call →

A 409A valuation is an independent appraisal of the fair market value of a private company’s common stock, used to set option exercise prices at or above fair market value, so the options stay exempt from Section 409A. A US business needs a 409A at these four points:

• Before the first issuance of stock options to employees
• At least once every 12 months while options are being issued
• After any material event — fundraise, major contract, M&A activity, significant change in business outlook
• Before a new round of option grants, if the last valuation is stale or something material has changed

IRS safe harbour: an independent appraisal is presumed reasonable only for grants made within 12 months of its valuation date. Without that presumption, if the IRS later shows an exercise price was below fair market value, option holders face immediate income inclusion, a 20% additional tax and interest, and the company has withholding and reporting obligations.

EasePro 409A valuations are prepared independently and documented to the requirements of Treas. Reg. §1.409A-1(b)(5)(iv)(B).

No single method works for early-stage startups. The right approach depends on revenue stage:

• Pre-revenue: Venture Capital Method — estimates exit value at a future event and discounts back at a target IRR.
• Early-revenue: Market Approach — comparable funded companies and recent precedent transactions. Capital IQ and PitchBook databases.
• 2+ years revenue: Income Approach (DCF) — becomes credible if driver-based projections can be supported.

Scenario modeling is essential across all three — base, stress, upside with weighted output. Investor-grade early-stage valuations typically combine Venture Capital Method, Market Approach, and scenario modeling. Single-method early-stage valuations rarely survive scrutiny.

Financial modeling and business valuation answer two distinct questions:

• Financial Model: The Excel engine that projects future financial performance — P&L, balance sheet, cash flow, KPIs, scenarios.
• Business Valuation: The formal output that uses the model and applies a methodology (DCF, comparables, precedents) to determine what the business is worth at a specific date.

The financial model is the engine; the valuation is the formal output an auditor, IRS, court, or counterparty can review and defend. Most EasePro valuation engagements include building or reviewing the underlying financial model — a valuation built on an indefensible model is itself indefensible. See how financial modeling supports valuation →

Four differences:

• Documented methodology. Every report names the valuation framework applied. For financial reporting work, fair value is measured under ASC 820 for ASC 805 purchase price allocations and ASC 350 impairment tests.
• Data-backed comparables. Comparable company and precedent transaction analysis is backed by Capital IQ, S&P, PitchBook, and Bloomberg data, with the underlying extracts preserved for audit.
• Four-eye review. Every valuation passes through internal review before delivery — built by one senior, reviewed by another against methodology, comparable selection, discount rate build, and sensitivity.
• Audit-survival design. EasePro valuations are designed to survive auditor scrutiny — our reports follow the structure audit-firm review teams expect.

Pricing context: Scope-based, from $1,450 per engagement.

More about EasePro →

EasePro business valuations start from $1,450. The final fee depends on scope, and we confirm it in writing after a short scoping call. What moves the fee:

• Purpose: a valuation for internal planning takes less work than one for a sale, a 409A option grant, financial reporting or a dispute
• Report detail: a short summary report takes less work than a full narrative report
• Complexity: the number of entities, business lines and classes of shares
• State of the books: clean, reconciled financials keep the fee down

For a rough, high-level number before you speak to anyone, our free DCF valuation model turns a few headline deal inputs, the kind found in a letter of intent, into an indicative figure. It isn’t a detailed valuation.

A valuer considers three approaches and relies on the ones that fit the business. The income approach discounts expected future cash flows to today, as in a DCF. The market approach looks at prices paid for comparable businesses or shares. The asset approach values the assets, less the liabilities. The IRS’s own valuation guidelines say all three should be considered. IRS Revenue Ruling 59-60 lists the factors behind the judgment, including the company’s history, its industry outlook, earning capacity, financial condition, goodwill, and earlier sales of its stock. Earnings are first adjusted for one-time items, because value follows earnings that will continue. Get a rough, high-level estimate with our free DCF model →

The purpose of the valuation sets the rules:

• 409A (stock options): an independent appraisal dated within 12 months of the grant is presumed reasonable; the IRS can rebut that only by showing it was grossly unreasonable
• ESOP: an independent appraiser under IRC §401(a)(28)(C), and no more than adequate consideration under ERISA
• SBA acquisition loan: the lender orders it from an ASA, CBA, ABV, CVA or BCA holder, not from the buyer or seller
• Financial reporting: fair value under ASC 820, used in ASC 805 and ASC 350
• Gift and estate tax: fair market value under Revenue Ruling 59-60

We confirm which applies, and any required credential, when scoping.

Start with your buy-sell or operating agreement. It usually sets the standard of value (fair market value, fair value, or a fixed formula), the valuation date, and whether discounts for a minority stake or lack of marketability apply. If the agreement is silent and the matter reaches court, state law decides. Many states treat "fair value" in shareholder dissent and oppression cases as excluding those discounts, but courts differ, sometimes within one state. If an SBA 7(a) loan funds the buyout, the lender orders its own independent valuation from a credentialed appraiser. Bring your attorney in early.