Hiring a fairness-opinion provider: define the transaction question precisely

A board considering a transaction may ask for a fairness opinion, but the phrase alone leaves important work undefined. Identify the proposed transaction, the consideration being evaluated and the holders or company interests covered. Different security classes can receive different forms of value. A conclusion concerning one group should not be assumed to cover every participant.

Involve transaction counsel in deciding the required assignment and intended use. The financial adviser should explain the question it can address and the information needed to do so. The engagement is not simply a request for a standalone business value that management can attach to any deal structure later.

A historical SEC-filed 2004 opinion for Moscow CableCom illustrates this specificity. It addresses stated transaction terms from a financial point of view as of its opinion date and expressly limits other matters. Use such documents to understand why scope matters, not as a template or as evidence that your transaction requires the same form of opinion.

Provide the complete terms the adviser is expected to analyze, including cash, shares, contingent amounts and any relevant allocation among holders. Identify which terms remain under negotiation. A presentation based on a simple cash amount may no longer answer the question if the proposed deal changes to a mixture of cash and securities.

For an invented illustration, suppose a holder would receive $5 cash plus one-quarter of an acquirer's share for each target share. At an assumed acquirer share price of $20, that package has a simple stated value of $10. At $16, the same contractual mix has a stated value of $9. Those calculations describe the consideration under the assumptions; they do not determine whether either result is fair.

Ask how the provider will address the form, timing and uncertainty of the consideration within its scope. A maximum earnout, a restricted security and cash payable at closing should not become interchangeable merely because all can be written as a dollar figure. Counsel and the financial adviser should resolve the applicable terms and analytical treatment together.

Prepare a controlled input package covering the relevant historical results, current trading, management forecasts, capitalization and transaction documents. Label preliminary information and unresolved reconciliations. The provider should know which figures management has approved and which assumptions remain proposals.

Ask what independent checking will occur and what information the adviser will rely on without verification. FINRA Rule 5150 has specific disclosure requirements for member-firm opinions issued to boards when the firm knows or has reason to know the opinion will be provided or described to public shareholders. Among them is disclosure concerning independent verification of information that formed a substantial basis for the opinion. Have counsel assess the rule's applicability rather than treating it as a universal requirement for every provider.

The practical procurement question is straightforward: what confidence does the assignment provide about the inputs? If separate accounting cleanup, diligence or specialist work is needed, identify it before setting the opinion timetable. A fairness opinion should not acquire an unstated role as an audit of management's forecast simply because the forecast appears in its analysis.

Ask the candidate to disclose relevant work for the transaction parties and the compensation associated with the proposed assignment. Identify which fees depend on completion and whether the same firm provides other transaction services. The decision-maker needs to understand the financial and professional relationships when assessing the advice.

For the public-shareholder circumstances within its scope, FINRA Rule 5150 addresses disclosures about advisory roles, contingent compensation, material relationships and committee review. It also requires member firms issuing opinions to maintain written approval procedures. These requirements provide specific questions for an applicable engagement; they do not establish that every arrangement using the word independent has the same safeguards.

Ask who performs the analysis, who challenges it and how disagreements are resolved before issuance. Review relevant experience with the transaction's structure and industry. A separate provider can still need careful conflict review, while using a transaction adviser for an opinion requires an equally clear understanding of its relationships and review process.

An opinion has a date and an information basis. Identify the planned decision meeting and the period needed for the adviser to complete its work. If the transaction is delayed, management should not assume that an earlier conclusion remains suitable without asking the provider and counsel what update is required.

Specify how the engagement handles a revised price, altered consideration mix, new financial information or a material change in assumptions. Agree who notifies the adviser and whether additional analysis, a new presentation or a refreshed opinion falls within the fee. A schedule that leaves no time for a late material change creates avoidable pressure on the decision process.

Keep versions of the transaction terms and financial inputs linked to the corresponding analysis. The Government Actuary's Department's model-quality guidance emphasizes deliberate assurance practices. In this setting, a clear record of the version reviewed helps prevent a board from considering one transaction while the supporting financial work describes another.

Read the proposed limitations with the people who will use the opinion. Determine whether it addresses relative treatment of different holders, management compensation, alternatives to the transaction or other matters important to the decision. If a question falls outside the scope, assign it to the appropriate adviser or decision process rather than assuming the opinion answers it indirectly.

The historical opinion cited here explicitly distinguishes its financial conclusion from the underlying decision to proceed and from a shareholder voting recommendation. The exact wording of your report may differ. Its presence should prompt a careful reading of the actual conclusion, assumptions and exclusions, not a general belief that a favorable opinion validates every aspect of a transaction.

Request a presentation that lets the responsible board or committee ask about the principal analyses and sensitivities before the conclusion is used. Retain the engagement, final opinion, supporting presentation and agreed distribution terms. A well-scoped assignment gives the decision-makers a defined piece of financial advice that they can weigh alongside legal, operational and other relevant evidence.