QUICK OVERVIEW ON FAIRNESS OPINION
Although most fairness opinions are linked to public transactions, it is reasonable to say that private transactions have gradually taken advantage of it. Public companies benefit the most from a fairness opinion provided the size and complexity involved in these types of transactions.
It is important to note that fairness opinion does not constitute a recommendation on a transaction price, distinction of the acquisition, deal structure, nor any tax implication and consequences.
Investment bankers and financial advisors are usually the ones being engaged in conducting a fairness opinion for a seller or buyer. The objective is to ensure that a transaction – from a financial perspective – is deemed fair for all shareholders (majority and minority). This opinion assists owners and board of directors with decision-making, legal repercussions, risk mitigation, and flow of information.
A fairness opinion provides an overall evaluation of a transaction from a financial perspective. Hence, the advisor must focus on prices, comparable companies, historicals, and particular details affecting the transaction.
Typically delivered as a short memorandum or letter, the fairness opinion is extensively curated from the following, “Financial history and earnings, distribution, comparable transactions, structure and term of the deal, facility touring, and management qualifications.”
Fairness opinion may be observed in public transactions under the following circumstances:
- Management Buy-out
- Going from public back to private
Fairness opinion may be observed in private transactions under the following circumstances:
- Passive ownership
- ESOP (Employee Stock Ownership Plan)
As mentioned earlier, fairness opinion assists the seller/buyer with an unbiased financial valuation. As an add-on piece of a due-diligence process, this opinion offers supplementary transparency when undertaking a possible transaction.