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409A and Valuation Report Review
Send the report, and get every significant assumption ranked by what moving it one notch does to the concluded value.
A 409A report runs 30 to 80 pages and roughly four of them decide the answer. The rest is method description, company background and market commentary, all of which is required and none of which moves the number. Every guide ranking for this query walks the report front to back and explains the three approaches. What none of them does is the thing a report actually invites, which is to read its own sensitivity tables and find out how much of the conclusion turns out to be a choice rather than a measurement.
Bellwater Systems is an invented company whose 61-page report carries a valuation date of 30 September 2025. Marketable common comes out at 3.02 per share. A protective-put discount for lack of marketability of 20.45 percent takes it to a concluded fair market value of 2.40. That discount is computed on three inputs and three only: volatility of 45.0 percent, time to liquidity of 2.00 years, and a risk-free rate of 3.90 percent. Every other page in the report is context around those three numbers.
The report prints its own grid of those inputs on page 54. Nine cells, and the concluded 2.4023 is the highest one in the table. The lowest, at four years and 65 percent volatility, is 1.8727, which is 22.05 percent below it. The review ranks each assumption by what one notch of movement costs, states the support the report offers for each, and stops there. It produces no value of its own.
The assumption with the largest effect usually has the least support
Rank the grid by effect and the order is not the order of the report. Moving volatility from 45.0 to 55.0 percent takes the concluded value from 2.4023 to 2.2494, a loss of 0.1530 per share. Moving time to liquidity from 2.00 to 3.00 years takes it to 2.3122, a loss of 0.0901. So one notch of volatility is 1.70 times one notch of time. Both matter more than anything in the market-approach section, which is where 22 of the 61 pages went.
Then look at what each input rests on. Volatility of 45.0 percent is supported by a named set of guideline companies, their tickers and their measurement windows, and it is checkable line by line. Time to liquidity of 2.00 years is one sentence citing management's expectation, with no document behind it. The input with 1.70 times the effect is the one that can be audited, and the weaker one moves the answer by 0.0901 per share every year it turns out to be wrong.
That asymmetry is not a defect in the report so much as the thing a reader is supposed to catch. The regulation asks a valuation method to take into account all available information material to the value of the corporation. And audit standards treat an assumption as significant precisely when it is sensitive to variation, such that minor changes can cause significant changes in the estimate. A grid whose concluded cell sits in a corner is a fact about the report. It is the reader's to raise, and the appraiser's to answer.
How it works
Send the report
The valuation summary, the allocation section and the sensitivity tables, with the concluded value and its inputs.
Rebuild the grid
Each cell recomputed from the stated inputs, and the concluded value located inside the report's own range.
Rank by effect
One notch of movement per assumption, priced in currency per share and as a percentage.
Test the support
What each assumption rests on, named by page, and which of them nothing in the report corroborates.
What you get
- Every significant assumption ranked by what one notch of movement does to the concluded value
- The report's own sensitivity grid rebuilt, with the concluded cell located inside it
- The support each assumption rests on, named down to the page and the exhibit
- The discount for lack of marketability recomputed from its three stated inputs
- Cross-checks between sections, where the report's own numbers disagree with each other
- The questions worth asking the appraiser, ordered by the value at stake in each
Common questions
Does this produce a valuation?
No, and it is built not to. It reads a report somebody qualified already signed, rebuilds the arithmetic the report states, and reports where the conclusion is sensitive. Concluding on value is a licensed act. What comes back is a review of a document, with the questions it leaves open ranked by the amount at stake in each.
What if the report has no sensitivity table?
Then the review says so as a finding, because the absence is the finding. Where the discount inputs are stated it recomputes the grid from them, since a protective-put discount is a closed calculation on volatility, term and the risk-free rate. Where the inputs are not stated either, it lists exactly which ones would have to be asked for.
Why does the discount for lack of marketability get its own treatment?
Because it is the one number that is both large and computed from assumptions a reader can move. On Bellwater it is 20.45 percent, and pushing volatility to 65.0 percent takes the concluded value down 12.57 percent on its own. The regulation names discounts for lack of marketability among the relevant factors, so it is squarely in scope.
Can this tell me the report is wrong?
It can tell you where the report is fragile and where it disagrees with itself, which is different. A concluded value sitting at the most favourable corner of the report's own grid is not an error. It is a set of choices, each defensible alone, that happen to point the same way, and that is worth a question to the appraiser.
How does this relate to the mark we carry?
A 409A conclusion is struck for a tax purpose on a common share, so it is an input to a mark rather than a mark. Where the position is being carried at fair value, the valuation methodology pack holds the bridge and the input register the audit will ask for, and this review is what fills the input register's source column.
What should the company have done differently?
Usually it is timing rather than method. The safe harbour runs from the valuation date printed inside the report, not the delivery date, and the 409A preparation checklist tracks that window. On the reading side, where the market approach is the part in doubt, comparable company and multiple analysis is what tests the set the multiple came off.
Does it check the cap table the allocation ran on?
It checks the share counts the report used against whatever you send, and flags a difference rather than resolving it. Where the preference stack itself is the question, cap table and waterfall analysis works the allocation directly, and fund performance and benchmark analysis is the one to reach for at the fund level.
409A and Valuation Report Review
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