Merger & Acquisition Insights

The Most Common Characteristic in Successful Transfers of Ownership: Shared Risks

Posted on January 04, 2019 by Beau McGinnis

Shared risks are present everywhere in life. For example, we deal with insurance, taxes, and social security daily, all of which spread the risk across many parties. Shared risk is found in even the most unlikely of places — a fourth-grade group project has shared risks; Tommy will fail if Susie doesn’t do the work, and yet Susie will fail if Tommy doesn’t do the work. No matter where we see the practice take place, it serves a crucial role in the success of projects and transactions, and especially in the transfers of ownership.

Since 1973, Tenney Group has witnessed the most common characteristics in successful and unsuccessful transfers of ownership, alike. For successful transfers of ownership, shared risks play a vital role. This practice doesn’t mean the threat of bad outcomes is pushed on someone else, rather, it means the likelihood of uncertainty is reduced.

Imagine a buyer coming to the table with an all cash deal, paid up front with no holdbacks or no protections. In this scenario, the seller bears no risk and as the Steve Miller Band popularized, can “Take the Money and Run.”  Although minds often stray to the buyer’s point of view, the seller can also err with the lack of shared risk. If the seller finances the whole deal or the entire deal is an earnout, the buyer bears no risk. So, if the company falls apart, no harm done to the buyer and the seller is left without a penny.

When all parties involved, including the lender, have skin in the game and have a vested interest in the future success of the business, the transfer of ownership is more likely to be successful. What’s important to note with all of this is that no matter whether an individual is the seller or the buyer, the path to shared risks doesn’t start without cooperation and communication. Ultimately, a mutually beneficial outcome is the goal in these transfers, but often, it doesn’t come without both parties willing to adopt risk.

Tags: Valuation

Category: Articles