Fairness opinion valuation – Everything you need to know

This article provides you with a complete guide to fairness opinion and its valuation.

When it comes to financial investments or any transaction of business, it is important to approach it with a sense of fairness. As such, we constantly look for some sort of fairness to help us make decisions that are right for us. In order to ensure that fairness exists, we need to know what it is and how it can be measured. In this regard, fairness opinion refers to the opinion of a financial advisor or an expert that provides advice on the fairness of a transaction. Basically, it is an analysis of the deal from the perspective of financial advisors. This article provides you with a complete guide to fairness opinion and its valuation.

Fairness Opinion

In a financial transaction where two parties are involved, fairness opinion comes into play in order to determine whether the transaction is fair. Merger, acquisition, carve-out, spin-off, buyback, or other types of transactions are such examples of financial transactions that may be evaluated with the help of a fairness opinion. It provides guidance through the expertise of the financial advisor and helps the client in making a decision. As such, it helps in raising confidence among the parties involved in the transaction and further prevents any disputes that may arise.

What is a fairness opinion?

As the name suggests, a fairness opinion is an expert opinion that analyzes a financial transaction to determine if it is fair. In this regard, it involves an expert providing advice to the client. Such a transaction may be an acquisition, spinoff or merger. These huge projects require sophisticated knowledge, analysis, and a lot of investments, which is why expert opinions are required to provide guidance in such a deal. They are typically written by qualified experts, analysts or advisors, usually from an investment bank, law firm or accounting firm. Such opinions ensure that client trust is maintained throughout the transaction.

How does fairness opinion work?

Financial advisors or experts write fair opinions in such a way that they provide detailed information to the client. In addition to this, they involve their own experience and knowledge in assessing the fairness of the transaction. These advisors examine the specifics of the transaction or deal, such as the terms of the agreement, the company and its financial condition, the nature of the transaction, the price of the transaction, the benefits and risks of the transaction, and other factors.

Complete details about the transaction are discussed and analyzed in order for the expert to produce a fair opinion. This opinion may be used in the form of a letter or report, which is then submitted to the client. It may also be used to convince the shareholders and other stakeholders to support the deal that is on the table. The expert will attempt to justify his opinion about the fairness of the transaction. Hence, it is important to ensure that the opinion letter is well-researched and is supported with a lot of logical explanation.

What is the importance of having a fairness opinion?

Fairness opinion plays a very important role in economic transactions and may be used to aid the management or directors. Following are a few reasons why you should get a fairness opinion:

  • A fairness opinion provides the management team with a lot of information about the transaction and its fairness. It further provides a detailed analysis of the deal from the financial perspective, which is crucial in assessing the worth of the transaction.
  • A fairness opinion can help in preventing disputes between the parties involved in a deal. It provides a perspective for negotiations, which helps the management to understand how the other party may view the transaction and its fairness. This, in turn, allows them to make well-informed decisions.
  • Typically, businesses have a number of alternatives that they may consider before choosing the deal. They compare them based on their different attributes and try to identify which choice is the best. In order to do so, it is important to approach the deal in an unbiased manner. Fairness opinions can provide a comprehensive assessment of such alternatives and help the management in evaluating them.
  • When you have a fair opinion, it will boost your confidence about that particular deal and may help you sell your idea to others who may not be in favor of it. It can strengthen your arguments, which may come in handy during negotiations or when you want to convince others about the fairness of such a deal.
  • Many times, when a company is involved in a deal such as a merger or acquisition, shareholders may sue the company or the management for approving such a deal. To prevent such legal consequences, it is important to get a fair and unbiased opinion from an expert advisor.

Disadvantages of fairness opinion

There are some disadvantages that you should know about before getting a fairness opinion; here are some of them.

  • A fairness opinion may come at a high cost, and you should be ready to spend on it, particularly if the potential for a deal is high. This is because it involves a lot of research and time, which comes at a price.
  • Although fairness opinion is not legally binding, it is expected to be fair and unbiased. As such, the management or directors should verify the expert’s credentials and reputation before deciding to engage with them.

Important considerations to look for in fairness opinion

It is essential for financial advisors to have a proper understanding of the deal to be able to provide a fair opinion. The due diligence process is an essential aspect of a transaction, and as such, you should ensure that the financial advisor who is providing the opinion has all the necessary information. Advisors should have a thorough understanding of the business, its operations, past financial performance, factors affecting future performance, the industry, customer demographics and other relevant factors.

They should also have the necessary experience and knowledge about the specific industry to ensure that their opinion is comprehensive. Additionally, the management team should be involved in the process due to the fact that transparency and communication are essential for a fair opinion.

Example of fairness opinion

To better understand the process of a fairness opinion, let’s take a look at an example of a fairness opinion of the merger of Monsanto and Bayer. In 2016, Bayer and Monsanto came together to form a new entity. Morgan Stanley, which is a global leader in financial services, was involved in the process of determining the fair value of Monsanto. The proposed value was $66 billion for the merger with Bayer.

Monsanto’s financial advisor Morgan Stanley conducted a fairness opinion in order to determine the fairness of this particular deal with the help of facts, valuations, and figures. They stated that the cash offer of $128.00 per share made to shareholders was a fair deal. For this fairness opinion, Morgan Stanley charged $120 million; this shows the importance of fairness opinion.

Fairness opinion valuation

A fairness opinion valuation report is a document produced by an external party to provide an opinion about the fairness of the deal. Generally, investment banks are hired for this purpose in order to value the transaction and its fairness. The fairness opinion report is prepared after a comprehensive evaluation of the transaction, which includes an assessment of the deal based on its business and financial attributes.

How does fairness opinion valuation work?

With mathematical models, proper analysis, and calculations, the fairness opinion report will provide a fair degree of valuation to the deal. It gives insight into the different aspects of the transaction, which include its various business attributes, cash flows and its future prospects. The experts will use this information to conduct a thorough analysis of the transaction’s projected financial performance and make a decision on whether or not it is financially advantageous for both parties involved in the deal.

Why do you need fairness opinion valuation?

You may wonder what is the need for fairness opinion valuation. Here are some deals or transactions that may require fairness opinion valuation.

  • M&A dealsMergers and acquisitions are the most common type of transaction where a certain company buys another company. In such deals, fairness opinion valuation is needed to ascertain the fair value of the company being acquired.
  • Takeover – When the majority of the stake of a company is taken over by another company, it is called a takeover. It is very important in such a deal to ensure that the deal is fair, and the fairness opinion valuation is an important tool to determine this.
  • Conflict transaction – A conflict transaction is a deal that involves any proposed transaction between the company and its subsidiary or affiliate, however, other than the investors. Hence, fairness opinion valuation is needed to ensure that the deal is fair and free from conflict of interest.
  • Recapitalization – Recapitalization refers to a restructuring where the company undergoes a renewed financial objective, as well as a corporate strategy. Typically, either exchange of debt for equity or equity for debt takes place in this type of transaction. Fairness opinion valuation is necessary to ensure that the deal is fair and beneficial to both parties involved.
  • ESOPEmployee Stock Ownership Program is an employee benefits tool that allows employees to acquire shares of the company at a prescribed value. Therefore, the fairness opinion valuation can be used to ensure that the price at which employees are given the shares is fair.
  • Private companies with diverse ownership – Private companies may be owned by one or many shareholders. When the deal is being made, it is important to ensure that the deal is fair and in the interest of all parties involved. Fairness opinion valuation in this regard is an essential tool wherein the shareholders can be given a fair value of the deal. In addition to this, the shareholders cannot sue the directors for any type of misconduct after the fairness opinion is provided.
  • Related party transaction – In these types of deals, the transaction is between two parties who have similar interests or they are familiar with each other. As a result, the fairness opinion valuation should be undertaken for such a deal to determine the fair value.

How to value a fairness opinion

There are many methods that are used to determine the valuation of a business in order to create a fairness opinion valuation. The basic methods include:

  • Comparable company analysis – In this method, the financials of other companies that are similar to the company being valued is examined. The fairness opinion report will then determine the value of the company based on its comparative analysis with those companies.
  • Comparable transaction analysis – It is one of the common methods used in M&A in determining the value of the M&A transaction. This approach uses data of similar or comparable past transactions of that company which is to be acquired. Thus, it provides the basis for the valuation of the proposed transaction.
  • DCF valuation (Discounted cash flow analysis) – The future cash flows are examined in this method and further they are discounted to the present value. In other words, it helps to determine the value of an investment today based on projections of how much money that investment is expected to generate in the future.
  • LBO analysis (Leveraged buyout analysis) – In this analysis, determining the maximum price that can be paid for a company, with financing in the debt markets, that would potentially generate a return to a financial buyer. In other words, this approach determines the price that can be paid by a financial buyer for a target.

Choose Eqvista for business valuation services!

Fairness opinion valuation entails a thorough analysis of the deal. It includes the complete analysis of the various aspects of the deal including, financials, accounting, board details and other important aspects. Eqvista provides business valuation in order to ensure that the deal is fair and to give the stakeholders involved a clear idea when it comes to the financial aspects of the deal. Contact us to learn more about our valuation services!

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