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An important step for many merger/sale transactions is the Fairness Opinion. A Fairness Opinion is designed to document, for the benefit of the buyer's directors and its shareholders, that the decision to pay x to acquire y is justified from a strictly financial point of view. Originally, Fairness Opinions were entirely thought of a means of complying with various states' securities laws which generally require directors to follow the expanded doctrine of the "business judgement rule" and make informed decisions. Also, of course, to avoid lawsuits! The Delaware Supreme Court in its Smith vs. Van Gorkom 1985 decision expanded the requirement to both properly make and document important corporate buying decisions with the interests of all shareholders in mind. Over the years, Fairness Opinions have evolved and can now be defined as a knowledgeable third-party's opinion that a price paid is financially fair. Investment banks generally issue Fairness Opinions. In the middle-market, however, competent Business Appraisers issue them since they are trained to determine what is financially fair, and the opinion is generally addressed to and accrues to the benefit of both the Buyer and the Seller (larger businesses' boards may each have a financial advisor, who will typically each issue their opinion to their respective boards.) JLP&Co.LLC has been retained to issue several Fairness Opinions

NASDAQ has recently proposed a rule - which has since been approved by the SEC [SR-NASD-2005-080] - requiring public companies to disclose the full extent of their relationship with the issuers of fairness opinions. Of course, I have a interest in this issue, and I do believe it's a great idea. Without that disclosure, how could an investment bank, which stands to gain a fee for arranging the merger, be expected to also be fair to the shareholders and issue the opinion at the same time? Unless the conclict of interest is disclosed and knowlingly waived, would it not be better to let the investment bank make the deal happen, and an independent third party issue the fairness opinion ?

There are several other reasons to require a Fairness Opinion before closing a corporate acquisition of either assets or stock. If the closely-held Buyer is offering stock, of course it must be valued, which requires standard BV skills. If the deal is expected to be litigated, perhaps by minority or junior shareholders, then it only makes sense to obtain an independent third party's opinion. Fairness Opinions generally are issued with supporting schedules which, if not as detailed as a standard BV appraisal report, certainly provides financial justification to the opinion. JLP&Co.LLC Fairness Opinions always outline in table form the necessary calculations of a range of values, using appropriate valuation methods under the specific facts and circumstances of the case. The range is then compared with the consideration.

The Fairness Opinion is a short document, typically a letter. The supporting work behind the letter, however, is substantial. A well-developed Fairness Opinion is based upon at least inquiries, due diligence and conclusions in the following areas:the financial performance and factors governing earnings; the dividend paying history and capacity; the pricing of similar transactions; the investment characteristics of the price to be paid; and a review of the terms of the underlying agreement between buyer and seller. The financial advisor must develop an opinion of value; there is substantial due diligence involved, and this at a minimum involves visiting the business, interviewing its managers and others in the industry, and researching its prospects from a wide variety of sources. Click here to read a sample Fairness Opinion


Over the years, we have helped a large number of owners of small to mid-sized businesses in many industries sell out ! They generally contact us after starting the process of selling their business, which they could not complete. In many cases, an investment banker was involved, but the owner could not easily get comfortable with the value recommendations of the investment banker.

Most business owners, while not all that familiar with the dynamics of selling their business for best value, instinctively know who to sell it to. As experienced industry insider, he/she knows that someone already in the industry will most likely pay more than an investor new to it. Also generally known is the fact that investment value [the value to someone in particular] is often higher than Fair Market Value [FMV is defined as the price between a theoretical buyer and a theoretical seller.] Often, the contribution of the business appraiser is to estimate and document both FMV and Investment Value to a potential buyer already known of management- and let the other professionals take it from there. In the negotiation, the seller will appreciate knowing what the business is worth to that potential seller. The latter's price is generally different from FMV because his cost of capital will be different, his risks different, his revenues and costs also different from the seller's. In such cases, it is recommended that several scenarios of investment value ranges be derived to match the potential buyer(s.)

Most investment bankers know their business well, and accordingly are most knowledgeable about the market value, and the likely investment value of a given business. That advice, of course, is provided by someone with a high level of interest to closing a specific transaction and collecting a fee for doing so. Many owners have commented that, since the Business Appraiser charges for his time and his time only, and has no interest in whether a particular transaction, or its alternative, or for that matter none close, an additional level of comfort is obtained by the seller simply by involving a Business Appraiser. This may be particularly important when various classes of owners are at odds, or simply when fractional interests are involved. The Business Appraiser will determine the demonstrated FM or Investment values, as opposed to the approach of the investment banker which tends to provide the value to his safest buyer.

Often valuation involves trying to be fair to conflicting interests; valuation by an interested party on the other hand does not go into such details. A Business Appraiser, on the other hand, will not find you a buyer. Perhaps retaining a Business Appraiser will help keep all your professionals on the same page [yours!] Please call us to discuss: 203-325-2703 or e-mail or web or web

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Revised -- 11/9/09