In part one of this two-part blog series, we went over some simple basics on what are known as fairness opinions in the business brokerage world. Referring to a report that speaks to the overall financial fairness of a proposed transaction, fairness opinions are common in business sale settings -- meaning they're important to know the ins and outs of.
At Utah Business Consultants, we're happy to serve as a top business broker in Salt Lake City and nearby parts of Utah, helping clients with everything from business valuations to the entire process of selling their business. When are fairness opinions used, and why should you consider using one during any business transaction you're taking part in? Here's a rundown.
Examples of Settings Where Fairness Opinions Are Used
Here are some of the most common situations in which fairness opinions will be used:
- Business acquisitions: When one company is acquiring another, the purchasing company will likely want to ensure that it's not overpaying for the business being acquired. In this scenario, a fairness opinion would be obtained from an independent third party to verify that the acquisition price is fair.
- Business divestitures: If a company is looking to sell off a division or subsidiary, it may also seek out a fairness opinion to ensure that the sale price is reasonable.
- Company takeovers: In a hostile takeover situation, the company being taken over may want to obtain a fairness opinion to prove to shareholders that the offer price is fair.
- Financing transactions: In some cases, companies may seek out financing by selling a minority stake in the business to an equity firm or venture capitalists. In these types of transactions, fairness opinions are often obtained by the minority investors to verify that they're paying a fair price for their stake in the company.
- Management buyouts: When a company's management team is looking to buy out the business from its current owners, a fairness opinion may be used to demonstrate to the owners that the offer price is fair.
As you can see, fairness opinions can be used in a variety of different business transactions. In each case, the goal is the same -- to ensure that all parties involved are comfortable with the price being paid or received.
Why Use a Fairness Opinion?
If you've never been involved in a business transaction before, you may be wondering why fairness opinions are used. After all, can't the parties just agree on a price and move forward with the deal?
There are a few reasons why fairness opinions are often used in business transactions. For one, you heavily decrease the risks associated with the deal. Remember, a fairness opinion is effectively an insurance policy -- if something goes wrong and it's later revealed that the price wasn't fair, you could potentially backs out of the deal or receive compensation for any losses incurred.
In addition, using a fairness opinion can help to pave the way for a smooth transaction. If all parties involved in the deal are comfortable with the price being paid or received, it's much less likely that there will be any problems or hangups during the process.
Finally, fairness opinions can add a layer of legitimacy to the deal. If you're selling your business, for example, having a fairness opinion can show buyers that you're serious and ready to move forward.
For more on fairness opinions and their use in business sales, or to learn about any of our business brokerage services in SLC or nearby areas, speak to the team at Utah Business Consultants today.