Areas of Risk
There are two components to each transaction: compensation and risk. While many investment bankers and business owners tend to focus almost solely on compensation, we give equal consideration to the risk associated with each transaction. There are three primary areas of risk:
(1) Known risks, for example the liabilities set forth on the company's balance sheet, or known regulatory risk;
(2) Unknown risks, for example, unanticipated employee or customer lawsuits; and
(3) Transactional risk, which is the risk that the transaction will be litigated, either prior to or after a closing.
How to Manage Risk
We analyze the risk associated with each transaction and formulate a strategy to manage it. Our investment bankers typically:
· Conduct a risk inventory or survey;
· Assist in identifying and mitigating any liabilities while still in the planning stage of the transaction cycle;
· Consult regularly and closely with a client's accountants, attorneys and other advisors who have extensive knowledge of the business;
· Assist the client in retaining experts to handle specific issues, such as international taxes, background checks, goodwill valuations, etc.;
· Carefully manage each stage of the transaction cycle to comply with our overall risk reduction plan.
Through execution of our risk-reduction strategies, we reduce the chance that problems will arise during the transaction. Typically, when significant problems do arise, buyers assume that the seller is either incompetent or dishonest, and accordingly may terminate the transaction or seek to reduce the price. If undisclosed problems arise after the closing, the buyer often sues the seller.
By properly managing risk, we
(1) increase the likelihood that a transaction will close,
(2) optimize the price, and
(3) reduce the chance that a lawsuit between the buyer and seller will occur prior to or after the closing.