“Life isn’t fair.” I heard this phrase more than a few times when I was growing up and I didn’t think that something was split perfectly evenly between my little brother and me. I complained often that it wasn’t fair that he got to stay up as late as I did despite being younger and how he always seemed to get to sit in the front seat of the mini-van. Our sense that things need to be “fair” rarely seems to wane as we grow older. “Fairness” is a term that has many different meanings to many different people. “Fairness” may truly be in the eye of the beholder.
So, how can anyone offer an opinion on what is deemed to be “fair?” Business valuation experts are often hired to craft a fairness opinion on a particular transaction. Based on the expert’s years of experience, training, and professional judgment, an opinion is rendered as to whether a transaction (typically a merger or acquisition) is deemed to be “fair.”
What is a Fairness Opinion?
Investopedia defines a fairness opinion as a “report that evaluates the facts of a merger, acquisition, carve-out, spin-off, buyback, or another type of business purchase. It provides an opinion about whether or not the proposed stock price is fair to the selling or target company.”
So, in a typical scenario of a business being acquired, the analyst will examine the facts of the transaction, and determine if the seller is getting a “fair” price for the company. The analyst will typically use methodologies that we commonly see in valuation reports to determine fairness. The analyst make look at a discounted cash flow model, and will likely rely on completed transactions involving companies in a similar industry. Public company multiples will also likely be examined.
Why is a Fairness Opinion required?
Typically, fairness opinions protect the seller from the risk of litigation. If an independent third-party verifies that the shareholders are receiving a fair value for their shares, then the risk that the shareholders file suit claiming that they were harmed by the selling price becomes less likely. Analysts are often hired by the selling company’s board of directors to ensure they are carrying out their duties as fiduciaries for the shareholders.
Given the amount of capital that is available, the M&A market is likely to continue to heat up in the coming months. Fairness opinions, although not always required, can be an effective way to reduce litigation risk for the seller in a transaction. Outside of a formal fairness opinion, engaging a third-party, independent business valuation advisor can be valuable to a company that is undertaking a buy or sell-side transaction. Having the outside perspective can sometimes shed light on risks or opportunities that the companies involved with the deal overlook.
The transaction advisory team at DKB has authored fairness opinions and has advised on a number of M&A transactions in a wide range of industries. Contact a member of TeamDKB’s Business Valuation team today to find out how we can help!