Fairness Opinions
AVGI assists management in fulfilling its fiduciary duties by providing our expert valuation analysis and unbiased opinion about the financial fairness of pending transactions.
What is a fairness opinion?
A fairness opinion is a report from a financial point of view that assesses whether the terms of a merger, acquisition, or other type of proposed transaction offered are in line with the monetary value of the company and fair to the company’s shareholders. It provides key stakeholders with an informed valuation of whether the proposed purchase price is equitable to the selling company. A fairness opinion allows businesses to ensure transparency, fairness, and objectivity for buyers and sellers involved in the proposed transaction. It assures all parties that the proposed stock price is fair and reasonable and that independent experts have thoroughly evaluated the transaction and found it fair and sound. Board members, directors, and other fiduciaries commonly demand fairness opinions to learn the value and fairness of financial aspects of transactions.
What is the benefit of getting a fairness opinion?
A fairness opinion is a valuable tool in several proposed transaction scenarios. In friendly transactions, a fairness opinion assures both parties that the price is fair so they can close the negotiation process satisfactorily. In a hostile takeover, a fairness opinion can help mitigate the risk of litigation against board members of the target company who can prove that they have applied the business judgment rule. The opinion ensures that even disgruntled shareholders against the merger or acquisition know that the price is fair. If the case escalates to litigation, the target company can use the fairness opinion as a defense in court to prove that board members fulfilled their fiduciary duty to shareholders.
When is a fairness opinion necessary?
Typical situations requiring a fairness opinion are:
- Regular mergers & acquisitions
- Affiliate, insider, and related-party transactions
- Synergistic mergers
- Transactions involving competing offers
- Down-round financings
Even in cases where fairness opinions are not technically or legally required, they can help mitigate litigation risk and provide a level playing field for all parties involved. Fairness opinions often require comparing companies in the same industry and including recent transactions to ensure the opinion is accurate.
Why choose AVGI for a fairness opinion?
A fairness opinion is an objective report ideally compiled by independent, unbiased experts with a deep understanding of valuation. However, it is common for the involved parties to rely on the investment bank in charge of the merger or acquisition transaction to issue a fairness opinion. This practice can understandably create a conflict of interests, which calls the fairness of such an opinion into question. In addition, using an investment bank to get a professional opinion is only relevant for significant transactions involving large companies.
AVGI is an entirely independent valuation firm with an innovative approach to company valuation. Our fairness opinions are entirely unbiased, based on deep market research and sound valuation methodology. The accuracy, detail, and documentation level in AVGI’s fairness opinions makes them able to withstand extreme legal scrutiny in the case of litigation, lowering the company’s overall risk.
When is a fairness opinion delivered?
A fairness opinion is generally delivered late in the negotiation stage when both parties are interested in closing the deal, often just before the board approves the deal and signs the agreement.
As fairness opinions become relevant at later stages of deal negotiations, these reports demand a high level of expertise with a fast turnaround time. Despite extreme time pressures, AVGI never compromises on research, valuation, or report quality and is committed to delivering high-caliber fairness opinions that both parties can rely upon to close a mutually beneficial deal.
FAQs about Fairness Opinions
What is the difference between a fairness opinion vs valuation?
Fairness opinions are essential to supporting transaction value and decision-making for every business that is conducting a business transaction. Valuation is the assessment of a specific company and its potential to produce in the foreseeable future. The difference between them is that valuation provides the parties with a dollar value for the price of the target company. However, a fairness opinion is used to express whether or not that price is reasonable.
What are common business scenarios requring a fairness opinion?
All businesses contemplating transactions require expert opinions of the fairness of a transaction from a financial advisor or an expert who is qualified to provide a fairness opinion.
- some companies perform fairness opinions as part of due diligence regularly
- preparation for future transactions
- part of a current transaction to provide assurance for buyers, sellers, board of directors, shareholders, banks and potential investors
- federal requirements to proves source of funds
- post completion of a transaction to prove legal and upright conveyance
AVGI provides financial solvency and capital adequacy opinions on behalf of boards of directors, lenders, equity sponsors, and investment banks to help them assess the financial stability of a subject company. Fairness opinions are necessary and advisable for transactions involving public and private companies.
What is a Solvency Opinion?
A solvency opinion is a report from a financial point of view from an independent third party assessing the company’s financial position and ability to meet its long-term financial obligations. A solvency opinion encompasses the assets, liabilities, liquidity, shareholder equity, and projected performance of the subject company; it follows a process of due diligence for both the buying and selling entities. Solvency opinions try to answer four questions.
- In the event that the transaction takes place, does the purchasing company’s assets exceed, at fair value, its liabilities?
- Does the company acquiring the target company have a solid way to pay future portions of existing debts?
- Is the company’s capital structure solid enough to ensure a capital surplus, and is its stated equity value greater than the dividends it offers to shareholders?
- Is there asset deficiency, or are the company’s assets, at fair value, sufficient to support the deal?
A financial advisor, a fairness opinion provider, or a valuation analyst may give a fairness opinion. If any type of deal would leave any company insolvent, it is classed as a fraudulent transfer unless there is evidence that the directors acted in good faith. The company can prove that by having a fair offer supported by an accredited opinion.
Why Get a Solvency Opinion?
A solvency opinion can be a crucial deciding factor for companies or investors in contemplating a potential merger or acquisition. Companies can also use solvency opinions for internal review.
Our opinions supply the assurance and security our clients need to protect themselves from the risk of fraudulent conveyance in:
- Leveraged transactions
- Stock redemptions
- Dividend distributions
Solvent companies sometimes find themselves in a financial crisis and unable to raise short-term funds to deplete their liabilities. It is critically important to use an accredited valuation company for getting the solvency opinion in such a case since only valuation analysts have the tools and skillset to produce an accurate and meaningful fair value solvency analysis.
How does AVGI assess financial solvency?
We use a range of industry-standard solvency ratios to examine the business’s assets and liabilities from different perspectives and determine its financial solvency. We also assess the business’s performance compared to the competitive market and creatively apply original formulas and financial modeling to project future business performance and sustainability.
Some of the solvency ratios we examine include:
- Debt to assets ratio
- Debt to capital
- Debt to equity
- Debt to tangible net worth
- Debt to EBITDA
- Total assets to equity
- Total liabilities to equity
AVGI’s expertise in valuation, restructuring, and mergers and acquisitions creates a strong foundation for rendering solvency and other capital adequacy opinions. If you want greater confidence about an upcoming transaction, contact AVGI for an expert fairness or solvency opinion to ensure you make the right move for your business.
FAQs about Solvency Opinions
What are typical examples requiring a solvency opinion?
- changes in business structure, including spin-offs and split-offs
- recapitalizations through revaluation of shares
- Leveraged transactions
- Share buybacks as part of corporate restructuring
How is a solvency opinion different than a fairness opinion or valuation?
Solvency opinions, fairness opinions, and business valuations are all important components of a successful business transaction, but each serves a different purpose.
A solvency opinion assesses a company’s current financial position and current ability to meet its long-term financial obligations. A fairness opinion examines whether the price offered for a potential deal is indeed at fair market value or if it should be higher or lower based on the company’s true value. A business valuation is a far more in-depth assessment that places a dollar value on the company- not only based on its current standing but also considering future projections of growth or decline.