Fairness Opinion

Shouldn’t there be something about Love and War that goes here? You know...all’s fair? Eh. Maybe not.

But ok...a tale of two companies; The One Who Boogs, LLC...and We Love Gross, Inc.

Each owns 40% of a small operating business that makes nostril trimmers shaped like the 16th century French apothecary. The division? Yeah. It’s called NostrilDomus.

A dozen other shareholders own the remaining 20% of the company privately.

The One Who Boogs wants to buy out the 40 percent of NostrilDomus that We Love Gross owns, and the 20% owned by everyone else.They’ve co-owned this company for decades, since great grandpappy Longsnout partnered with another great grandpappy: Sneezy (no relation).

The division will do $100 million in revenues this year and generate $15 million in cash profits. So how does it get valued? And why is it important for that value to be…fair?

Well, lots of potential for corruption here and unsquare dealings. Maybe Gross would sell out cheaply in return for Boogs to back out of the Russian territories where it does big business. Sort of a tit-for-tat business deal. But then the 20% minority owners of the division would be screwed, because they didn’t get full and fair price for the division that was sold.

They don’t benefit in the way that Gross would benefit by then being able to run the tables (or nostrils) of Russia...and the apostrophe-Stans it controls. You know, like where Borat comes from.

So in order for everyone to be treated fairly, an investment banker is usually called in to write a fairness opinion. That opinion then is used to frame the purchase price and terms of whatever deal goes down.

A big part of the banker’s value-add is creative solutions to bridge valuation gaps, where one company thinks it’s worth more than the other, or at least more than what it’s getting in the deal...and while bankers’ fairness opinions focus mostly on just the cash value of a company, bankers often whisper through one side or the other deal dials that can be turned, where companies then feel more fairly treated, and happier to sign on the dotted line.

Those whispers are things like extended term payments, paying with some equity instead of all cash, and 50 other little things that companies care about. And if they didn’t care about those things, then, uh…they’d be more likely to...take a nosedive.