Death, taxes – even divorce – are some of the more sobering circumstances that underscore the need for an independent valuation. Even when the motivation is more upbeat – such as a qualified buyer with a serious offer – the existence of an independent appraisal can provide the parties with a sense of reliability.
Consider the sudden death of a shareholder. An expert assessment of the value of the privately held company involved will be needed for the estate tax filing. What happens when a married couple with ties to the company decides to divorce? If either spouse is a shareholder, a value must be assigned to those shares. In some situations, independent valuations are required; in others they won’t be mandatory but may prove to be quite useful.
For example, private investors, known as Private Equity Groups (PEGs), invest billions of dollars in entrepreneurial ventures. The management teams typically receive significant non-cash incentives (such as stock options) as part of their compensation packages. Recent legislation, section 409A of the Internal Revenue Code (IRC), addresses taxation of deferred compensation. Recipients of options are taxed according to the extent options are “in the money” when granted. The “in the money” portion is deemed to be current income and subject to being taxed as such. The taxable portion, if any, depends on the value of the company’s underlying stock. That value is established by “qualified appraisals” issued by an independent party.
Likewise, a PEG-backed company might seek an independent valuation to properly account for an acquisition. As part of many PEG models, “platform companies” grow by acquiring other similar or related companies. To comply with FASB 141, the purchase price paid in an acquisition must be allocated so that the assets acquired can be properly booked on the buyer’s financial statements. A purchase price allocation valuation, assigning value to all of the acquired intangible assets (and goodwill) must generally be performed by an independent party and using specific methodologies developed for this purpose.
PEG-backed companies may also benefit from an independent valuation for fairness or solvency opinions. While not widely applied to privately held companies, fairness opinions – which are not required – can be an important aspect of a board of directors’ due diligence when entering into a transaction. This may be especially true if the shareholder group is diverse and members represent differing interests, which may be the case for companies with complex capital structures, including preferred classes of stock. In contrast, solvency opinions may be required by statute in certain situations. In both scenarios, the use of independent advisors is critical to establishing credibility.
Fortunately, not all situations requiring independent valuations are as severe as death and taxes. The receipt of stock options, successful acquisition, or sale of a company offer good opportunities for independent appraisals. While the reasons for engaging independent valuations may vary – particularly among PEG-backed companies – the results are clear. Independent valuations yield the information needed to meet all legal, filing, or fiduciary requirements.