There are a few situations during potential business sales and related transactions where third parties may be utilized by one side or the other to gauge the fairness and details of a particular deal. Among several different such programs, one of the most well-known across the world of acquisitions and mergers is the fairness opinion.
At Utah Business Consultants, we're proud to offer quality business broker services in numerous areas, from creating business listings and helping you determine exit value to actually moving forward with the sale of your company. What is a fairness opinion, who is it typically provided by, and what are some of its uses within business sales and related acquisitions? Here's a rundown in this two-part blog series.
As its title indicates, a fairness opinion is a basic report that is designed to state whether or not a proposed financial transaction is considered to be fair from a financial perspective. In particular, fairness opinions are often used in business sales where one company is being bought out by another - but they can also be used for other types of transactions, such as investments and recapitalizations.
A fairness opinion will typically outline the key aspects of the financial transaction in question and then make a determination as to whether the price being paid by the buyer is fair, based on a number of different valuation methods. In addition, the fairness opinion will also assess any potential conflicts of interest that may exist - for example, if the party providing the opinion stands to gain financially from the transaction itself.
It's important to note that a fairness opinion is not the same thing as a valuation report, which simply provides an estimate of what a company is worth. Rather, a fairness opinion makes a determination as to whether the transaction itself is fair based on a number of different factors.
In most cases, financial advisors from outside entities, such as investment banks or accounting firms, will be brought in to provide fairness opinions. This is because it's important for there to be an objective third-party assessment in order to ensure that the transaction is truly fair.
There are a few different ways in which financial advisors can be compensated for their services in providing a fairness opinion. In some cases, they may charge a flat fee for their services. In other cases, they may receive a percentage of the overall transaction value - although this is typically only done in larger transactions.
In part two of our series, we'll go over why fairness opinions are often utilized in business sales, plus some situations where they may or may not be necessary.
For more on this, or to learn about any of our business brokerage services, speak to the team at Utah Business Consultants today.