Frequently asked questions about valuation methodologies
Choosing accurate and appropriate methodologies for a 409A valuation is dependent on the specifics of each company and project.
Factors that influence methodology selection include a company's funding history, historical and projected financials timing to a liquidity event, and other factors.
The following are common methodologies accepted by the AICPA Practice Aid, the IRS, and the SEC.
Subject company transaction or “Backsolve” method: This methodology consists of examining the values of prior equity transactions of your company.
Guideline public company method: The guideline public company methodology relies on an analysis of publicly traded companies similar in industry and/or business model to your company. This methodology uses guideline companies to develop relevant market multiples using metrics such as revenue, and/or earnings before interest, taxes, depreciation and amortization (EBITDA). These multiples and values are then applied to your company’s corresponding financial metrics.
Income approach: The income approach focuses on the income producing capability of your company, and is commonly known as a discounted cash flow analysis.
Asset approach: The asset approach measures the value of an asset by the cost to recreate or replace it with another asset of similar utility. Under this methodology, the company’s value is based on the net aggregate fair market value of the entity's underlying individual assets and liabilities.