Fairness and Solvency Opinions

Fairness Opinions

BAS provides Boards of Directors and ESOP Trustees with Fairness Opinions in transactions involving the buyout of equity to address whether the buyout price and other terms of the deal are fair from a financial point of view to the various participants in the deal. Although fairness opinions are generally considered a requirement in public deals, BAS provides most of its fairness opinions in the context of privately-held companies. 

BAS’ fairness opinions not only guide a company’s Boards of Directors to seek a transaction structure that is fair to all parties involved, but our opinions also provide partial proof that the Board acted in a fair manner and used sound business judgment.   Business owners and directors find that fairness opinions are useful for many transactions, including insider deals, minority buyouts, business sale without an auction, and financings involving substantial equity dilution.

In its capacity as an independent financial advisor to an ESOP Trustee, BAS can advise the Trustee whether the ESOP Transaction and any related Redemption Transaction are fair to the ESOP from a financial point of view taking into account the terms of the ESOP Stock Purchase Agreement, a corporate Stock Redemption Agreement and any other material factors that are contemplated in connection with the ESOP Transaction and the Redemption Transaction.

In its Fairness Opinions, BAS addresses the following specific issues from a financial point of view:

    1. Is the total consideration to be paid in the transaction fair from a financial point of view?
    2. Is the long-term rate of return that is expected to be generated by the buyer reasonable compared to the rates of return that can reasonably be expected to be generated from other alternative investments?
    3. Are the terms of the financing to be incurred and expenses to be paid by the Company in connection with the transaction fair from a financial point of view?  Are the interest rates on the indebtedness to be incurred in the transaction in excess of a market rate of interest that would likely result from a current arm’s length negotiation with lending institutions?
    4. Are proposed changes in management compensation and profit sharing participation percentages for certain employees fair from a financial point of view?
    5. Are the prices and terms of simultaneous transactions involving multiple classes of stock fair relative to each other?

 

Solvency Opinions

 BAS also provides Boards of Directors and ESOP Trustees with Solvency Opinions in leveraged transactions, which address relevant issues about a company's ability to meet future debt repayment obligations. Our Solvency Opinion is designed to give a Board of Directors confidence that proceeding ahead with a transaction involving a high degree of financial leverage is a rational and prudent decision. 

A solvency opinion typically involves both a fair market valuation opinion and a forward looking analysis of the firm's operations. The question to be answered is whether the company is receiving "reasonably equivalent value" in exchange for the obligation incurred. Many times the transfer simply involves stock for cash, which is financed by debt.  Failure to establish a basis for reasonably equivalent value may constitute constructive fraud.  Certain risks exist if there is an economic downturn for the Company after the transaction, since there may be an appearance that the transaction debt is partially to blame for the downturn. However, if a highly qualified, independent firm does sufficient due diligence and is able to render a solvency opinion at the time of the transaction, courts will generally accept it as evidence of the firm's solvency at the time of the transaction.

BAS addresses the following questions in its Solvency Opinions:

Immediately following the consummation of the Transactions and after reflecting the terms of the Transactions,

    1. Are the fair value of the assets of the Company greater than its liabilities,
    2. Is the Company reasonably expected to be able to pay its debts as they become due in the normal course of business, and
    3. Is the Company left with an unreasonably small level of working capital?

The answers to these questions will depend, in part, on the results of BAS’ quantitative analysis regarding the structure of the deal and the economics of the company on a pro forma basis.  In order to withstand legal scrutiny in connection with U.S. bankruptcy law and the Universal Fraudulent Transfer Act, we perform our quantitative analysis on several levels based on many different financial scenarios that have a reasonable chance of occurring.  In our solvency analysis, we stress-test the company’s financial projections to determine the degree of change to the financial forecast that would be necessary to cause insolvency to occur; we then analyze the degree to which realistic possibilities exist for various negative economic events to occur that would cause the financial forecast to deviate enough to cause insolvency. 

Value for the Cost

BAS is an excellent resource to provide a fairness opinion and a solvency opinion in a small to mid-size transaction at a relatively low cost. We perform investment banking analyses without charging investment banking fees.

 

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ESOPs | Corporate Valuations | Purchase and Price | Litigation Support