Can Management Do Its Own Valuation of Profits Interests for Financial Reporting?

For sure, absolutely, 100%? . . . ?wait, well actually maybe ?

Information for CFOs and accountants in private equity

Many of my new clients have a common problem.

It goes like this . . .

?? - Completed a new platform or add-on acquisition. Excellent!

?? - Key people got profits interests as incentives. Potential payout in an exit. Awesome!

?? - The profits interests get favorable tax treatment and a $0 tax basis. Fantastic!

Onward and Upward!↗?

Later, accountants start work on the audit. They identify the profits interests are subject to GAAP under ASC 718. This means management must come up with a value for all profits interests issued.

Huh? Totally unexpected.

No worries.? The profits interests have no cash value. The 83(b) election was $0.

So easy, nothing to record. Right?

Wait For It . . .

Surprise! The profits interests can’t have a $0 value for financial reporting.

What???

That Makes No Sense

Disbelief. Research. Meetings. Disagreement. Delay. Frustration.

Why is this necessary?? No one cares about the value of profits interests. Not important.

Eventually, management accepts it’s required for GAAP . . . and of course doesn’t impact tax positions.

Ok. How does management come up with a value? Turns out this requires special, complex option valuation methods that management is NOT AT ALL familiar with.

Hmmm . . . might have to hire an outside valuation firm.

Now The Excitement Begins

For any number of reasons, management wants to give the valuation a try.

A DIY approach, just go for it! ????

Happens all the time.? And I get it.

People don’t always want to ask for help.

Time To Decide

Management faces this situation wondering . . . can we do this ourselves. . . how difficult is it . . . does it really require an expert. . . what are the risks . . . is there a short cut . . . or a cheaper way?

Tough one.

Though not as risky as icy mountain climbing.

Still when it comes to valuation of profits interests for financial reporting, it can be very helpful to have an experienced, expert, professional, guide - like me ????.

If it helps reach decision on your journey, below are some of the . . .

Top Reasons *** ?NOT TO GET *** My Expert Assistance

??Hey You Got This

You completely understand and already know everything possible about fair value, special valuation methods, and financial reporting requirements for profits interests. Congrats! Can we discuss hiring you?

??What’s the Big Deal?

You’re no expert in any of this, but how hard can it be? You’ll do it yourself and get it right or just keep trying.? Over and over, again and again . . . if that’s what it takes.? Who needs help on something this confusing or complicated anyway?

??Ok, There’s Probably An Excel Template For This

You can do a Google search, go to YouTube, or download something.? Or just ask around.? There’s got to be something out there.? Makes you wonder why valuation professionals even exist at all.

??You Have Lots of Time to Burn

You won’t mind wasting time and resources trying to figure this out.? No reason whatsoever for you to have all the information you need and an easy cost-effective way to get this done. You’re not busy at all and looking to invest big time on things that are not very important.

??You Love Problems

When it comes to the financial statements, you look forward to surprises and not having an easy solution.? You actually hope something goes wrong, just for the challenge. So exciting!? It will sure be fun getting out of that mess, won’t it?? Awesome, let’s do that again.

??No Worries

Your auditors won’t care at all about what you come up with. ?They won’t require a fair value for profits interests using special, professionally required methods you don’t understand. Anything you do will be absolutely fine. Time for lunch?

??You’re Bullet Proof

Who cares if this gets messed up and creates issues with the audit or diligence!? There’s absolutely no way you could ever be held responsible. Besides, no one is going to make you fix it either, are they?

??You Absolutely Love Doing Really Boring Stuff

You can’t wait to dive into research for information on accounting and valuation requirements for profits interests. You look forward to endlessly searching and reading thousands of pages of mind-numbing requirements you don’t understand.

??No Rush. This Can Wait

Oh yeah . . . you know about this. And the deadline to adopt. When it comes to compliance, you don’t like to prepare and get ready in advance.? It’s always better to hold off for a last-minute fire drill on things like this.

??Never Going To Have That Situation Here

Of course not.? You’re a private equity owned company organized as an LLC, and issue equity-based incentive compensation to employees in exchange for services. Right?? You don’t have what everyone else like you in private equity does. Just checking.

??Sorry, There’s Someone Else

Ouch.? At least you actually have someone and it’s not about me.? No reason to look around for anyone better.? Settled for what you got. Just remember to think about me from time to time. ?Look me up when you change your mind. I promise not to say I told you so.

Best, David??????????

“For more than a decade, the only expert I know?? specializing in valuation and financial reporting for profits interests in private equity."

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