It’s All About Risk-Reward

Anyone who owns or operates a business understands it’s all about risk-reward.  The old adage, “nothing ventured, nothing gained,” is true in business and in life.   The risk-reward analysis also applies to business deals and the underlying contracts – and if your business attorney doesn’t recognize this, you’d better make a change now.

Business transactions, by their nature, involve risk – after all, the safest course of action is almost always to do nothing, or perhaps, to simply do what you’ve always done or what everyone else is doing.  However, while those might be the safest alternatives, they’re rarely the most profitable and are never game-changers for your company.

So, how do businesses and lawyers work together to evaluate potential risks and rewards and reach that delicate balance where the risk level is acceptable and warranted in light of the reward?  I think it comes down to a few key principles:

First, the client identifies and communicates the ultimate objective and how critical it is to achieve that objective – is it “bet the company” important or essential to the company’s survival; or is it simply something you’d like to achieve, but only if the risk is minimal?

  • Next, the client determines and communicates what level of risk is acceptable (this can be measured in dollars, timing, opportunity cost, reputation, etc.).
  • Third, initially and throughout the process, the lawyer informs the client of legal risks of various decisions and courses of action, and the client makes informed decisions.
  • Finally, the client and lawyer work together to achieve the business objective,  seeking to maximize the upside reward and minimize the risk at all stages – from initial discussions with the other party and their counsel, to preliminary negotiations, to drafting the term sheet or letter of intent, to conducting and evaluating due diligence, to executing definitive transaction documents and ultimately closing (or not closing) the deal.

There will be many times in a business deal where the question has to be asked – what is the risk of this approach, and does the potential reward of the deal justify that risk?  These determinations can only be made effectively when there is close communication and a clear meeting of the minds between client and attorney.

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