Psst – “Risk” is not a swear word

Disclaimer: Not legal advice

The saying goes that there is no reward but for the presence of risk. There is no truer saying in my experience as a commercial lawyer.

Some risks are worth taking on - for example, taking on a role at a higher remuneration which requires a greater degree of responsibility.

More prevalent is the category of risk where it's unclear if it's a good or a bad one. For example, taking a loan where your family trust is a guarantor and your family home is security; a business acquisition; a business partnership; or even something so ordinary like signing a terms of trade with your supplier.

The prospect of getting a commercial gain in any venture is obviously alluring. Yet, the pathway to get there is quite often obscured by a hazy mist. I visualise "business risk" as that hazy mist. It's not only difficult to see through, but it also conceals potholes and pitfalls.

I recall an experience where the client had come to us because he had a dispute with his landlord. He had bought the business the year prior to seeing us. He bought it because the rent was attractively cheap. The rent hadn't been reviewed for over a decade. So our client borrowed a fairly substantial amount of money from the bank, and bought the business. Fate was not kind to our client, as the landlord decided to sell the building to another person. The new landlord was not so lenient and immediately triggered the market rent review provision in the lease, which effectively doubled the rent. The business wasn't so feasible anymore, and unfortunately, from our review of the lease, there was little that our client could do to challenge the market correction. There was no silver lining for the client, unfortunately. Our client needed to close the business. Oh, and he also still had that bank loan that he was still obliged to repay.

I hope you don't see this only as an opportunity to check the market rent review clauses in your leases. Otherwise, you might risk missing the forest for the trees. No, the larger narrative here is this: Risk is inevitable, but it can (and should) be managed. It is a deliberate and conscious exercise, which, if appropriately adopted, will help you navigate the labyrinthine environment of the commercial world.

I'll try to end on a positive note. Another client of ours asked us to review a supply agreement where our client would be receiving supply at a price predetermined by the supplier. Our client was operating in a price-conscious market, so he was alive to the risk that the supplier's prices could price him out of his own business. A notable vulnerability was the arrangement was exclusive, which meant that our client couldn't get supply from any other supplier. In that situation, we helped our client negotiate a clause which fixed a margin for each unit of supply that our client sold, and pegged this to the lowest price of our client's nearest competitors. Our client, would effectively, be insulated from the effects of price competition in the region. It wasn't an easy negotiation, but it was accepted in the end.

Did it pay off? Immensely. The recent update was that there was a recent entrant to the market which placed further pressure on prices. Our client reckons that his competitors would probably be suffering a lot. He isn't though - he's fairly comfortable that he's getting a fixed margin for every unit of supply, and that he is always going to be competitively priced no matter what the market was doing.

The moral of both stories is this: "risk" isn't something that you should (or could) avoid. However, it is something that could (and should) be managed. You'd be thanking your past self for having done so.

Contact us to discuss your situation.