What does a typical valuation analysis of a company consist of?

Most of our work is referred to us by attorneys and accountants. We provide valuation opinions to publicly traded and private companies that are pursuing a merger, acquisition, divestiture, recapitalisation, wealth transfer, business dispute, or any number of other reasons where a value opinion is needed.

The valuation of any business is a complicated assignment, and every project is different. There are many characteristics of this work that I truly enjoy. For starters, it requires the analyst to fully understand the nature of a company, its history, and the industry. We look to grasp where the company is headed by way of projections of revenues, expenses and cash flow. We then perform a thorough analysis of the market, including analyses of both public companies that operate in the same industry as well as prior transactions of similar, private and public companies. Our industry standards require that we consider multiple approaches to each valuation analysis – the three generally considered valuation approaches are the cost approach, the income approach, and the market approach. The goal is to have a triangulation of value among the three approaches, but every company and every transaction is unique, and we treat them as such.

Please explain a fairness opinion and solvency opinion and why a company would need one.

Fairness opinions and solvency opinions are typically requested by those with a fiduciary responsibility to their noncontrolling shareholders or members, e.g., a board of directors.  Both opinions assist the board with its decision to approve or not approve a transaction by providing them with an independent analysis of the transaction. Should the decision ever be challenged in court, our opinion helps protect the board by showing that a third-party adviser provided unbiased insight. Fairness opinions and solvency opinions are recommended for both private and public company transactions.

For a fairness opinion, our role is to determine if a potential transaction is fair, from a financial point of view, to a particular party. If the transaction is for an acquisition – that party could be either the seller or the buyer. From the sell side, we ensure that the price being paid is not too low and, from the buy-side, we ensure that the price being paid is not too high. The fairness analysis requires that we value the subject company and compare that value to the consideration being paid.  We experienced a great increase in SPAC/de-SPAC fairness opinions in 2021, where we were asked to determine if the merger with the SPAC target was fair to the SPAC investors from the buy-side perspective. We expect this type of work to significantly increase over the next 12 months.

For a solvency opinion, we determine if the recapitalisation event or the raising of the company’s debt will drive the company into an insolvent position. We opine on the three tests of solvency, namely that the company is solvent from a balance sheet perspective, in addition to ensuring that the company can continue to pay its expenses and debts as they come due and that it also has adequate capital reserves in case of a business downturn. Our solvency opinion work has significantly increased since 2020 as dividend recapitalisation transactions by private equity investors have been on an upswing.

Fairness opinions and solvency opinions are similar to a typical business valuation in terms of approach, but fairness and solvency analyses require additional detail, rigor and research given the risk profile of the assignment. For that reason, my team of professionals who lead these analyses have decades of valuation and transaction consulting experience.

How do you differentiate your services from your competitors?

We provide fully independent fairness opinions and solvency opinions. I stress "independent” because our fees are not contingent upon whether the transaction closes, nor contingent on the size of the transaction.  We work on a fixed fee basis for all fairness opinion and solvency opinion work. This compares to some firms that offer contingent based, investment banking services or advisory services and a fairness opinion for the same transaction. However, we believe that doing so is an inherent conflict of interest because of the simple reason that if the transaction does not close, they do not get paid. Plain and simple – they are fully motivated to opine that a deal is deemed fair or that a company will remain solvent post transaction.

We also believe that our transaction opinion review process is second to none. The project team is typically led by a very experienced managing director. Their work is then reviewed by senior members of the firm, including myself. Finally, the analyses and opinions are presented to our internal committee – which consists of four executive board members of our firm. The committee includes our Chairman, a seasoned corporate attorney; our Vice Chairman, retired ‘Big 4’ audit partner; our President and CEO; and the leader of our national Financial Valuation and Consulting practice. Every one of our fairness opinions and solvency opinions must pass their scrutiny before we take it to our clients.

What are the key complexities that can arise during the process?

One of the biggest issues that we run into – especially with solvency opinions – is when the company is viewed differently from a day-to-day operational perspective as compared to its legal structure. For instance, advising counsel will typically want a solvency opinion at each step of the transaction, i.e., from where the debt flows in, to where any cash flows out. If a company has a complicated legal structure, the debt may flow in very low on the ownership chain, and not in an entity that is typically viewed on its own, standalone perspective.

Other complexities include fairness opinion assignments that require the valuation of the equity of entities on both sides of the transaction or rollup transactions (e.g., up-REIT transactions) that require the valuation of equity in multiple funds or entities being consolidated. Some transactions require that we determine values for underlying assets such as investments in real estate. For these assignments, we have a robust in-house real estate valuation practice that plays a key role.

How do you resolve them?

We understand that many of our clients do not have experience with valuation concepts, fairness opinions or solvency opinions – so we educate them along the way and work through the challenges. Sometimes this means brainstorming with their counsel and other advisers on new ways to solve a problem. Each transaction is unique and that is what makes our work challenging and exciting! We enjoy being a resource to our clients and earning the opportunity to be their trusted advisers.