As key advisors to businesses large and small, accountants routinely help clients avoid or manage risks. But one often-overlooked way in which to help clients manage risk is to advise them on obtaining fairness opinions affirming that a sale or merger transaction is fair to the company's shareholders from a financial point of view.

Although such opinions are a fact of life in deals involving public companies, there are often compelling reasons for privately held businesses to obtain them as well. Armed with knowledge from the fairness opinion, the client will be better able to make an informed decision about a change-of-control transaction and avoid a potential disaster down the road.

Fairness opinions - a primer
As the level of merger and acquisitions activity grew exponentially over the past three decades, the fiduciary duties of the company board of directors came under increasing scrutiny. The development of Securities and Exchange Commission regulations and key court decisions, especially in the 1980s, highlighted the need for boards of public companies (including but not limited to those being acquired) to make an informed decision using the Business Judgment Rule. In essence, boards had to exercise due care, act in good faith and in a disinterested manner ? and not abuse their discretionary position.

These requirements have led boards to hire financial advisors to act as independent third parties, not only to assist the directors in the decision-making process, but also to provide evidence that the board has complied with the Business Judgment Rule. The fairness opinion has become a universally accepted instrument that is used to effectively prove such compliance.

Why fairness opinions for private company transactions?
There are several reasons why owners and boards of private companies are increasingly emulating their public counterparts by obtaining fairness opinions when considering merger or sale transactions. These include:

- Family ownership issues. Disputes between family members, especially those in management vs. those outside, have become commonplace.

- Large number of shareholders. Many private businesses have complex capital structures and different classes of ownership (e.g., preferred vs. common equity), resulting in divergent interests.

- Lack of outside board members. Private, especially family-owned, businesses often lack outside, independent expertise in evaluating transactional fairness.

Any or all of these factors increase the risk that a transaction may be challenged by dissenting minority shareholders during the sensitive pre-closing stage, where the lack of a fairness opinion may cause the deal to be postponed or completely derailed.