Much has been written about “fairness opinions” due to the financial manipulations among companies such as Enron, Tyco and others. The conflict in the use of fairness opinions was (and is) that an investment banking firm not only handled the sale of a company, but also got paid for doing a fairness opinion. For example, when the Bank of America decided to buy Boston’s Fleet bank, B of A paid the investment banking firm of Goldman Sachs $3 million as a retainer, $5 million for a fairness opinion, and was prepared to pay a success fee of $17 million if the deal actually was completed.
Keep in mind that a fairness opinion is prepared by one or more financial experts, or by a firm, to protect the shareholders; in other words, to assess whether or not the deal is fair to the real owners of the business. It also protects the officers and board of directors from shareholders who feel that their company is paying too much for the business being acquired. It is also apparent, from the example above, that the investment banking firm makes money, and a lot of money, through the entire purchase from beginning to end. They don’t have much of an incentive to really come in with a “fair” fairness opinion. However, regulators are looking at this obvious conflict of interest very seriously, and changes in the current regulations are almost sure to happen with full disclosure being only the first step.
So, how does all of this impact the privately held company? It is vital that an owner of a privately held company who has minority or family shareholders should also seek a fairness opinion. It may not have to be done by an investment banking firm and probably shouldn’t be prepared by the owner’s accounting firm, for the same reasons outlined above. A third party evaluation should be done to insure that a minority owner doesn’t come out of the woodwork and claim that the business was sold for much less than it is worth – at least according to the dissident shareholder.
A professional intermediary can be an excellent resource in the preparation of a fairness opinion for the privately held company. They can provide several valuation professionals and/or firms and also assist in the gathering of the necessary financial records. Generally speaking, a fairness opinion is prepared after the selling price is agreed upon. In the sale of a privately held company, the price may fluctuate throughout the negotiations, but a third party valuation can set the bar. And, it’s very possible that using a business intermediary to market the business will bring a price above the valuation, pleasing everyone.