You may have heard the term “fair value” or “fair market value,” so you might expect that a “fairness opinion” is focused on the same thing. The truth is, a fairness opinion may be based in part on fair market value, but there the similarities end. Let’s look into exactly what a fairness opinion is and when they are used. It’s best to start with an example. Let’s assume you are CEO of a family-owned business and you have several family members who are shareholders, but who are not active in the business. The shareholders have decided to sell the company and have entrusted you as CEO with that responsibility. You engage a business broker like Sports Club Advisors who finds a buyer and helps you negotiate a deal. The deal is ready to close when one of the minority shareholders claims the price is too low, or worse, the deal closes, then the minority stockholder decides to sue you, claiming the selling price was too low. A fairness opinion prepared as of the date you accepted the offer, or as of the closing date, provides an objective, third party opinion that the value paid for the company and the terms of the deal agreed to are reasonable and “fair”. So in essence, a fairness opinion is designed to protect corporate officers from complaints by shareholders that the officer violated their fiduciary duty to the shareholders by accepting a value or terms that were not reasonable.
A fairness opinion is usually in the format of a letter, about two to six pages long, that sets forth the factors or items considered, and a conclusion on the fairness of the selling price along with standard caveats or limitations. These caveats usually state that all the information relied on has been provided by others and not independently verified and that the actual assets of the business have not been valued.
A fairness opinion is usually prepared by an expert in business valuation such as a business appraiser or a business broker. The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert. It does not contain any recommendations on whether the deal should be accepted or rejected.
Fairness opinions are often used in the sale of public companies and when a private company has a large number of shareholders. It helps ensure that the board or the officers of the company are looking out for the best interests of the stockholders, at least as far as the selling price is concerned. A fairness opinion is especially important in the sale of a privately held companies if the company is being sold as part of a divorce settlement or the dissolution of a partnership since it helps ensure that the value arrived and negotiated between the parties is fair and reasonable and in the best interest of the shareholders.
If you are interested in getting a fairness opinion for a transaction you are contemplating, please contact Richard Jackim at 224-513-5142 or at email@example.com.