I've heard that Warren Buffet (who we all know is one of the world's greatest business magnates, investors and philanthropists) was once asked to define risk. Instead of going into chapter and verse, his answer was simple:
Risk comes from not knowing what you're doing...
Now, you would be hard pressed to find a contract or a commercial deal in which the parties are not exposed to some degree of risk. In my mind, that doesn't mean that the parties don't know what they are doing, it's the nature of business. However, if the parties cannot or do not identify and address those risks, then they may just fall into the category of not knowing what they're doing.
That is why it is imperative to conduct an effective and accurate assessment of all contractual risks at the outset.
Risk analysis is about developing an understanding of the risks posed. It considers the types of risks, the sources of risk, their potential positive and negative consequences and the likelihood that those consequences will occur.
The purpose of risk evaluation is to understand the outcomes of the risk analysis and to make decisions about which risks need treatment and what your priorities should be.
There are a range of ways in which to address risk and its treatment... the treatment option which is closest to my heart as a lawyer is that of legal risk transference – the act of transferring the relevant risk to your contractual counterparty. Alas, legal risk transference is not always an option, or may not always be the most commercial option.
Other methods for treating risks include:
Don’t put your head in the sand around risks, it won’t make them go away, it just means that you’re unprepared when they come to pass.
You're looking to buy a business - are you getting a bargain or are you setting yourself up for a ‘deep pocket’ experience…..financial due diligence (DD) is a critical phase of the entire due diligence process that should be undertaken.
You need to focus on:
Multiple years of audited financials (P&L and Balance Sheet), EBITDA forecasts/projections, aged receivables & payables, cashflow, capital spend, employee provisions, asset register….this list goes on and on.
Not sure where to start? Ask Barry White of Cross The T today by emailing email@example.com
In the business world, joint ventures really can be described as a great business love story.
Joint ventures offer the joint venturing partners a range of benefits including:
While joint ventures can offer great rewards to the joint venturing partners in the right circumstances, they are not without risk.
That's why it is imperative that the joint venture arrangements are appropriately discussed and documented at the outset of the relationship, while love is young, optimism reigns supreme and the roses smell sweet.
Many of my clients report that, once they have signed a construction contract, that contract gets filed away in the back of a drawer… that is, until a dispute arises.
Contract administration is, however, vital to being able to effectively monitor and control your project as the work takes place. It is the contract that tells the parties what their rights and obligations are in relation to making claims, providing notifications and otherwise performing the works.
Don’t get me wrong, contract administration can seem like an unnecessary formality but consider this as an example - construction contracts often include strict requirements around how and when certain claims may be made against the principal/head contractor. If you are unaware of what those requirements are, there is a chance that your claim may be time-barred or otherwise fail as a consequence of not meeting a particular contractual formality.
Can your business afford the cost of such a simple mistake that could have been avoided with appropriate contract administration?
Cross the T can work with you to prepare an easy-to-use and accessible guide on a project-by-project basis outlining when claims may be made, how claims may be made and any other formalities under your particular contract.
I have been providing legal advice to the construction industry for over 12 years, across a range of projects that adopt differing delivery structures via a vast array of differing documentation.
During that time, the key construction risks for contractors is always the same:
The best way to identify, minimise or otherwise mitigate your risk is to:
If you’re in the construction industry and are not sure what you should be looking for from a risk perspective in your contracts, why not contact Cross the T for a free, no-obligation conversation.
When you consider the cost of not understanding and addressing these construction risks at the outset, can you really afford not to Cross Your Ts?
Due diligence…sounds boring. Really who wants to get stuck in a room with paper work, accountants, lawyers and other advisors pouring over the records, looking at the products and otherwise tearing apart the new shiny business your heart is set on?
Due diligence may be hard work, and may seem painfully tedious, but the downside of not performing due diligence can be catastrophic.
Let’s imagine for a moment, we are looking at a reticulation retailer. We look at the business and the seller show us a set of glossy sales figures, lots of profit and a really exciting margin. Not knowing anything and without seeking advice we get all excited as we envisage new cars, overseas holidays and so on. This vision nags at us and a confirmation bias kicks in, as we are only human. Next thing is we are parting with our hard earned for this shiny vision.
We take possession of the business and the old owner walks away. Within a short period, there is something very wrong. The number of sales are significantly lower than the financial records indicate. In fact, within only a few months the turnover is less than half of what we were shown and thought we were purchasing. Appropriate financial due diligence would have revealed the issue and we would have known what we were actually buying.
That’s not the only area where we may get stung. In the same scenario the owner walks away and in a few months, things are going as promised, however suddenly out of seemingly nowhere the landlord serves us a notice to vacate. The building in which the business operates is about to be demolished and we need to move to a less than ideal location. Again, due diligence would have found the impending end of lease and enabled exploration of the issues prior to parting with the investment.
Imagine for a moment another scenario…our small reticulation store is named Irrigation Bushies Machinations, or IBM for short. The business has been named this for perhaps 20 years and has a great reputation. Part of what we invested in is the name, the legend and history of this long-established retailer. As we didn’t complete due diligence, we didn’t discover there is a passing off action pending… IBM (the company International Business Machines) has served previous notices to cease and desist with respect to using their business name. The previous owner has completed some research and discovered name recognition was responsible for 50% of the turnover and consequently didn’t want to change the name. The choices faced now are to defend the passing off case, which could very well be expensive, change the name and face an immediate drop in turnover, or perhaps worst of all, if this can't be resolved, is to walk away from the business altogether.
In this short article we have considered the potential downside of not performing due diligence. This article can’t take the place of professional advice, however, hopefully helps you appreciate the necessity of those rather boring due diligence discussions the accountant, lawyer or financial advisors have suggested.
Want to know more? Contact Cross the T by emailing Tania at firstname.lastname@example.org or Barry at email@example.com