How investment banks structure fairness opinions in complex deals

Fairness opinions provide a formal valuation judgment to support board decisions.

In M&A transactions, fairness opinions are written assessments issued by investment banks or financial advisors to determine whether the proposed financial terms of a deal are fair from a financial point of view to a specific stakeholder group—typically the selling shareholders. These documents are not binding recommendations but serve as protection for boards and special committees in fulfilling fiduciary duties under legal scrutiny, especially in conflicted or related-party transactions.

The engagement process begins with scope, independence, and access.

Investment banks start by defining the scope of review in the engagement letter, outlining whether the opinion will cover the entire transaction, specific classes of securities, or only the financial fairness of certain terms. Independence is also addressed up front: advisors must disclose any financial interests or prior relationships with the parties involved.

The advisor then secures access to key documents including:

• Financial projections prepared by management

• Historical audited and unaudited financial statements

• Proposed transaction documents (SPA, merger agreement, etc.)

• Valuation materials prepared internally or by other advisors

• Market data, precedent transactions, and peer multiples

Multiple valuation methodologies are used and disclosed.

Fairness opinions rely on at least three valuation methods, each tailored to the transaction context:

Methodology	Purpose
Discounted Cash Flow (DCF)	Projects intrinsic value based on future performance
Comparable Companies Analysis	Establishes value range using public peers
Precedent Transactions	Anchors valuation on recent similar M&A activity
Premiums Paid Analysis	Highlights acquisition premiums over unaffected price
LBO Analysis (if applicable)	Used in sponsor bids to test return feasibility

The selected methodologies and their assumptions must be explicitly disclosed in the opinion letter or its appendix.

Sensitivity testing and scenario analysis reinforce judgment.

To enhance defensibility, banks run sensitivity tables on inputs like discount rate, terminal value growth, or EBITDA margins. These yield a valuation range rather than a single point estimate. The fairness judgment is then positioned within this range, usually near the midpoint, unless deal-specific terms justify a different conclusion.

Scenario analysis may also be presented to address contingent value instruments (CVRs), earn-outs, or unusual financing terms.

Fairness opinions are reviewed internally through committee oversight.

Banks use internal fairness committees, typically composed of senior partners not directly involved in the deal, to validate the analysis and mitigate reputational or legal risk. This committee signs off on the logic, math accuracy, and structure of the opinion.

All documentation—including valuation models, meeting minutes, correspondence with the client, and data sources—must be retained in the deal file for regulatory or legal review.

Disclosure and delivery are tightly controlled in formal processes.

The fairness opinion is typically issued in connection with:

• A board meeting where the transaction is approved

• A proxy filing or tender offer document (e.g., Schedule 14D-9)

• Shareholder communications, especially when votes are required

While the actual opinion letter is often brief, the disclosure of methodology and assumptions in public filings is extensive and scrutinized. In going-private deals or management-led buyouts, fairness opinions are almost always required to meet fiduciary standards.

Fees are structured to avoid bias or contingent risk.

Fairness opinion fees are usually flat and not contingent on deal success, to preserve independence. This is distinct from the bank's broader success fee for advisory work, which may be contingent. Some firms maintain separate teams for opinion work to ensure structural independence from deal execution teams.

Fairness opinions serve as legal protection but not economic validation.

Ultimately, fairness opinions do not confirm that a deal is optimal or accretive—they confirm that the transaction falls within a range of reasonable outcomes from a financial perspective. Their legal utility lies in documenting the board’s reliance on an expert valuation judgment at the time of decision-making.

In contested transactions, fairness opinions can be challenged in court, making the transparency, methodology, and integrity of the process critical to their defensibility.

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