Fairness Opinions: Definition, Examples, and Significance


Fairness opinions provide a professional evaluation of the fairness of a major financial action, such as a merger or acquisition. Investment bankers or analysts offer these reports for a fee, helping parties involved in the transaction make informed decisions. This article delves into the definition, importance, and examples of fairness opinions in the financial world.

Fairness opinion definition

A fairness opinion is a critical component in financial transactions, offering insights into whether a proposed stock price is equitable to the selling or target company. This opinion helps stakeholders, like shareholders, advisors, and boards of directors, make informed decisions during significant financial actions, such as mergers, acquisitions, carve-outs, spin-offs, or buybacks.

Understanding fairness opinions

A fairness opinion is more than just a report; it is a professional assessment backed by data and market expertise. These opinions are typically prepared by qualified analysts or advisors, often affiliated with investment banks, and provided to key decision-makers for a fee. The analysis involves an in-depth examination of various aspects of the deal, including:

Deal specifics

The fairness opinion analysis delves into the specifics of the transaction, assessing the terms of the agreement and the price offered for the stock of the target or selling company.

Business synergies

The advisors evaluate possible business synergies that could benefit the target or selling company if applicable. Identifying potential synergies is crucial in determining whether the deal is fair.

Risk mitigation

Fairness opinions are not always legally required but are valuable in reducing the risk associated with major financial actions, including the risk of litigation. They can also facilitate communication between the parties involved.

Pros and cons of fairness opinions

Weigh the risks and benefits

Here is a list of the benefits and drawbacks to consider.


  • Provide an unbiased assessment of the fairness of a transaction.
  • Help in reducing litigation risks, especially in contentious transactions.
  • Facilitate communication among stakeholders.


  • Incur additional costs, as fairness opinions are usually prepared for a fee.
  • May not be legally required, leading some companies to forego them.
  • Opinions are based on available information and may not predict future outcomes accurately.

Example of a fairness opinion

Consider this real-world scenario:

ABC Company has made an offer to purchase XYZ Corp. for $10 million. The board of directors of XYZ Corp. is interested in determining whether this offer is fair. In the absence of other offers, XYZ Corp., as the target company, engages an advisor at Independent Investment Bank to conduct an analysis and provide a fairness opinion.

The advisor reviews three comparable transactions involving companies in the same industry with a similar business model to XYZ Corp. These transactions occurred within the last six months. The advisor calculates the EV-to-EBITDA multiple for the three comps. In this formula, EV stands for enterprise value, and EBITDA represents earnings before interest, taxes, depreciation, and amortization, using a 12-month period for EBITDA.

Based on the analysis, the advisor informs XYZ Corp. that $10 million is a fair value for this transaction. Consequently, XYZ Corp.’s board of directors approves the sale of the company for this amount. Fairness opinions are especially crucial in international cross-border transactions, often provided by local market experts.

Methods for preparing fairness opinions

Fairness opinions are meticulously prepared to ensure they provide an accurate assessment. Various methods and approaches can be used to create these professional evaluations. Here are a few commonly employed methods:

Comparable company analysis (CCA)

CCA involves assessing the target company’s financial data and valuation metrics in comparison to similar companies in the same industry. Analysts look at factors like market capitalization, revenue, and earnings multiples to determine the fairness of the proposed deal.

Discounted cash flow (DCF) analysis

The DCF method evaluates the present value of the target company’s expected future cash flows. This method considers the time value of money and the risk associated with the investment. A fair value is derived from the net present value of these cash flows.

Precedent transaction analysis

In this approach, analysts examine the selling or target company’s valuation concerning past transactions involving similar businesses. By comparing the proposed deal to historical transactions, an assessment of fairness can be made.

Challenges in providing fairness opinions

While fairness opinions serve as valuable tools, they come with their own set of challenges. Understanding these challenges is vital for a comprehensive perspective on this subject:

Subjectivity in valuation

Assessing the fairness of a deal often involves subjective judgment. Valuation can vary based on the method chosen and the assumptions made. This subjectivity can lead to differing opinions and may pose a challenge in providing a definitive fairness opinion.

Complex deal structures

In cases where deals involve complex structures, such as multi-step mergers or intricate financial instruments, determining fairness can become more challenging. Analysts must navigate these complexities to provide an accurate opinion.

Legal and regulatory compliance

Fairness opinions must comply with legal and regulatory requirements. Ensuring that these opinions meet the necessary criteria can be a complex process, especially when dealing with cross-border transactions.

Comprehensive example: fairness opinion in a cross-border merger

Consider a scenario where Company A, based in the United States, intends to merge with Company B, a European corporation. The boards of both companies are eager to ensure that the merger is fair to their shareholders. To assess the fairness, they engage the services of an international financial advisory firm, Global Advisors Inc.

Global Advisors Inc. takes a comprehensive approach to prepare the fairness opinion, considering the nuances of cross-border transactions. Here’s how they approach it:

1. Market analysis: The advisors at Global Advisors Inc. analyze the market conditions in the U.S. and Europe, considering factors like economic stability, industry trends, and currency exchange rates.

2. Legal and regulatory compliance: The advisors ensure that the merger complies with both U.S. and European regulations. They work closely with legal experts in both regions to navigate the complex regulatory landscape.

3. Valuation methods: Global Advisors Inc. utilizes a combination of valuation methods, including CCA and DCF analysis, to provide a well-rounded assessment of the deal’s fairness.

4. Risk mitigation: Cross-border transactions come with unique risks, including political and currency exchange risk. The advisors identify these risks and propose strategies to mitigate them.

In the end, Global Advisors Inc. presents a detailed fairness opinion to both Company A and Company B, assuring them that the merger is fair to their shareholders. This example highlights the importance of a comprehensive approach, especially in complex cross-border transactions.


In conclusion, a fairness opinion is a valuable tool in major financial transactions, providing an unbiased assessment of the fairness of a deal. While not always legally required, they offer numerous benefits, including risk mitigation and improved communication among stakeholders. Understanding the role and importance of fairness opinions is crucial for anyone involved in financial actions like mergers, acquisitions, or buybacks.

Frequently asked questions

What are the key components of a fairness opinion report?

A fairness opinion report typically includes an analysis of deal specifics, business synergies, and risk mitigation strategies. Analysts examine the terms of the transaction, assess potential synergies that benefit the target company, and identify strategies to reduce risk.

When is a fairness opinion required in financial transactions?

While fairness opinions are not always legally required, they are often sought in significant financial actions, such as mergers, acquisitions, and buybacks. Their necessity may vary depending on the parties involved and the nature of the transaction.

Who prepares fairness opinions, and what qualifications do they have?

Fairness opinions are typically prepared by qualified analysts or advisors, often associated with investment banks or financial advisory firms. These professionals possess expertise in financial analysis, valuation methods, and market dynamics.

What is the significance of a fairness opinion in international cross-border transactions?

In cross-border transactions, a fairness opinion becomes crucial for assessing the deal’s fairness within the context of different regulatory environments, market conditions, and currency exchange rates. It helps ensure that the merger or acquisition is equitable for shareholders in different regions.

Are there situations where fairness opinions may not accurately predict future outcomes?

Yes, fairness opinions are based on available information and assumptions at the time of the analysis. Market conditions can change, and unforeseen events may impact the outcome of a transaction. As a result, fairness opinions may not always predict future outcomes with complete accuracy.

Key takeaways

  • A fairness opinion is a professional assessment of the fairness of a major financial action.
  • It is often provided by investment bankers or analysts for a fee and is crucial in reducing litigation risks.
  • While not always legally required, fairness opinions facilitate communication among stakeholders.
View article sources
  1. Fairness Opinion Board Presentation – Michigan.gov
  2. Fairness Opinion – Sec.gov
  3. Fairness Opinion Report: The Spirit of the Law – TechTrans