How Much Do Fairness and Solvency Opinions Cost?
In nearly 20 years in financial services and business valuation, I’ve fielded questions for just about every aspect of fairness opinions and solvency opinions. But the one I’ve had to work my way around the most is, “how much does this cost?” Well, I wish I could give you a clear cut answer, but I really can’t. What I’ll try to do instead is provide some general guidelines that will help you select the right expert or firm for your situation.
First, I’d like to make this crystal clear–fairness and solvency opinions are not simple valuation analyses. And these valuations can vary greatly and cost multiple times that of traditional, simpler valuations.
So What’s the Actual Cost of Fairness and Solvency Opinions?
Fairness opinions often cost well into six figures and can actually run higher than $1 million for large sophisticated deals with high risk profiles. Typically, fairness opinions for public companies will cost more than private companies because there are usually more shareholders and increased scrutiny of the deal in question.
We’ve seen many fairness opinions in the lower and middle markets of private companies cost in the neighborhood of $50,000 to $100,000. But there are also many other issues that will lead to higher fees, such as conflicting shareholders and complex cap table waterfalls.
Advisors providing opinions for $10,000 or $20,000 probably shouldn’t be taken seriously. This price point is a huge red flag and only illustrates a lack of understanding the risks and the process required to provide an opinion that will withstand scrutiny and provide the insurance policy that a board or special committee is seeking. Unqualified advisors can leave you open to lawsuits and cost the exposed parties even more money in the long run.
What to Look for When Choosing a Valuation Advisor
Yes, credentials are important, but that doesn’t mean anyone that is certified is actually qualified. Traditional accounting, business valuation, and investment banking credentials do not mean the individual is qualified to do fairness or solvency opinions. Do your homework. Has the advisor or firm worked in your industry? Do they have the expertise to make sure you’re protected? Having relevant and transactional experience in your industry is invaluable when providing these opinions. Most traditional valuators and appraisers do not have this experience. While investment bankers may have the deal experience, they often lack the detailed valuation and specific opinion experience to address the complex issues that typically arise.
The main goal of an advisor should to keep your out of harm’s way and there is a great deal of due diligence required to:
- review the decision making process of the Board or similar group
- provide support that the Board has taken the necessary steps to make a reasonable proposal to its constituency
- exercise due care in considering the transaction takes time
Breaking Down Fairness Opinions…
For fairness opinions, your advisor(s) should provide your Board of Directors or Special Committee with information on valuation, deal process, and capital structure to prove they’ve filled certain fiduciary duties regarding the transaction.
The provider of the fairness opinion should give you an independent, objective analysis of a proposed transaction’s fairness from a financial point of view—completely free of conflicts of interest.
…And Solvency Opinions
Solvency and capital adequacy opinions should illustrate that the transaction in question will not:
a) prevent a company from fulfilling debt obligations
b) cause a company and its creditors undue financial distress
Companies with leveraged transactions are constantly scrutinized by stockholders, lenders, and regulatory agencies. A solvency opinion can protect the company—and its secured lenders, directors, and advisors—from potential liability relating to fraudulent conveyance claims. Transactions include leveraged buyouts, recapitalizations, and dividends or other similar situations where minimal equity is involved.
Solvency opinions are usually based on the following three financial tests:
Balance sheet test. The Balance Sheet Test measures the fair value of a company’s assets against its liabilities and contingent liabilities post-transaction. In this test, the “fair value” and “present fair saleable value” of company assets is typically based upon the company’s going concern enterprise value, estimated using standard valuation approaches and methods.
Cash flow test. The Cash Flow Test evaluates whether a company will be able to satisfy its debt obligations—including existing debt and any debt resulting from the proposed transaction. A key component of this analysis involves stress testing the company’s projected cash flows with various downside scenarios to determine whether obligations, including bank covenants, can be met.
Reasonable capital test. The Reasonable Capital Test performs additional sensitivity testing which analyzes a company’s post-transaction equity against various levels of market volatility. Even if a company’s total value exceeds its liabilities, its excess equity still might be too small to protect it if business conditions decline. The Reasonable Capital Test demonstrates whether a company will have a surplus of capital after a leveraged transaction by comparing it
Other Cost Factors of Solvency and Fairness Opinions
- Risk: Not only are you at risk of lawsuits, but your advisors are as well. If your valuation firm or advisor gets sued, it could cost them all the time they put in and could possibly cost them more than they charged you in the first place.
- Complex modeling: In a solvency opinion, modeling of cash flow and testing of assumptions adds time. In a fairness opinion, complex capital structures can also add time. And as we all know, time is money.
- Due diligence: Sufficient and thorough opinions can take more time than a standard valuation, due to the extreme amount of risk involved.
- Quick turnaround: If the Board of Directors needs a quicker turnaround, you’re going to need someone who shows up with the bench strength. Not just anybody has the right resources and experience to do quick turnarounds.
I hope this article helped you out a bit and cleared up some of the questions you might have about the costs of fairness and solvency opinions.
If you’re looking for more information on business valuations or just need some advice, contact us today.
Rich Barth is Managing Director at Vantage Point Advisors, Inc. He has compiled over 15 years of international investment banking and valuation experience at firms including Goldman Sachs, HSBC Securities and Houlihan Lokey.