Many people assume they know what “fairness opinion” means because they are familiar with the term “fair market value.” Fair market value refers to a price that is reasonable for both a buyer and seller in an open and competitive market. However, a fairness opinion is quite different. This term refers to a report that evaluates the facts of a merger, acquisition, or any other type of business purchase.
A fairness opinion is typically in the form of a letter that contains an actual opinion and justification of why a selling price is fair. Of course, there are limitations, as this report is fully based on information that has been provided by the management of the business.
Who Prepares a Fairness Opinion?
A fairness opinion must be prepared by a professional with expertise in business valuation. A business intermediary or appraiser typically prepares it. An investment banker can also prepare a fairness opinion. Although the professional who prepares the fairness opinion may very well have experience in structuring deals, this letter does not include any information or opinion on the deal itself. It also doesn’t include advice or recommendation. In preparing the report, the advisor seeks to look at the deal from the perspective of the investors. Basically, it is structured to specifically comment on fairness from a financial perspective, based on the information available.
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Who Uses Fairness Opinions?
You will most frequently see fairness opinions utilized in the sale of public companies by the board of directors. When this document is received, it shows that the board is working to protect the shareholders. A fairness opinion can also be used for private companies. In this case, it can serve to protect the interest of shareholders or family members who may later look to challenge the sales price. However, in most situations that involve middle market private acquisitions, a fairness opinion is not necessary.
A fairness opinion is valuable because it assists with communication and decision-making. It serves to lower the risks surrounding a deal. This important document can be used in court if a shareholder later decides to file a lawsuit against the director of a company.