Valuations audit

Author: The Carta Team

Read time: 5 minutes
Published date: 11 April 2024

Our experts walk through what you need to know about 409A valuations and how to prepare for a successful valuations audit.

How to manage the valuations audit process

Valuations audits can be tedious, but there are steps you can take to eliminate potential hurdles and set your team up for success.

1. Host a kickoff call between your audit firm and appraisers

Communicating with your audit firm and appraisers before starting an audit can help prevent confusion and frustration down the road.

“You can get completely different valuations on the same asset depending on who’s doing the valuation,” says Tami Tande, a senior manager on Carta’s 409A valuations team. “Auditors have their own internal standards and opinions on how things should be done,” she adds, so it’s a good idea to make sure everyone is on the same page regarding methodology and assumptions.

2. Prepare a financial forecast

One of the items a valuation firm looks at when reviewing a 409A report is the company’s financial forecast. Documenting any critical financial changes in your company and explaining these to your appraiser and auditor can result in a smoother, more accurate valuation.

When creating a forecast, make sure you address the effects of recent material events—for example, COVID-19—and use reasonable assumptions to support your predictions, says Candice Bassell, a managing director for Carta’s enterprise valuation team.

You may also want to include any recent significant transactions in your valuation analysis, says Brian Allen, Carta’s VP, Corporate Controller.

3. Review the valuation report and ask questions

Once your appraiser finishes your 409A report, review the valuation and ask questions. Understanding your valuation is crucial to effectively addressing any questions your auditor has later on.

4. Prepare written responses to auditor questions

After reviewing a valuation, your audit firm will likely send questions for you and your appraiser to answer. “If you get questions, it doesn’t mean it’s a bad valuation—it’s just part of the audit process,” says Allen.

Work with your appraiser and management team to provide written responses to your auditor’s questions.

5. Create a valuation memo

Before you close the books, create a valuation memo that can transport you to the mindset you were in when you went through a specific valuation, Allen says.

How often should you get a new valuation?

Most private companies get new 409A valuations annually or, sooner, if they experience a material event, like a merger or new financing round. However, with COVID-19 shifting business models and affecting financing, it can be helpful to get valuations more frequently.

If your company hasn’t been notably affected by COVID-19 or the economy, you may not need an updated valuation, Bassell says. However, “If your forecast has changed significantly or if you’ve gone through a reduction in force, a new valuation could be helpful,” she says.

409A valuations with Carta

A good valuation firm can facilitate the valuations audit process and make your job that much easier. Whether you’re getting a valuation for the first time or need a new valuation, Carta can help. We deliver over 6,500 409A valuations each year, so our team is well-equipped to guide you through the process and answer your questions.