From an outsider’s perspective, the idea of dealmaking seems straightforward, exciting, and even flashy. While that can be true, there are plenty of details in the fine print that can complicate the process, especially when it comes to understanding and mitigating risk.

The most obvious thing to weigh—whether you’re a friend providing seed capital or approaching a merger or acquisition with a mid-sized business—is if the risk is worth the reward. From an angel investor’s perspective, there may not be a big reward, so in this article we will be focusing on significant deals like mergers and acquisitions where there’s a lot at stake for both parties.

For the full conversation between AmpliFi’s Jake Chapman, Nick Lipetzky and Steve Swanson, watch the video below. Or, keep reading to get our take on how to best manage risk during the deal-making process.

Decide how much control you’re willing to give up

If you’re selling or merging your company and hoping to earn as the company continues to grow, you have to be prepared for anything to happen. Say you don’t sell all equity and you give up 90% of the company. That leaves you with 10%—or a minority stakeholder position. You’re giving up essentially any influence over growth rate or any other value drivers you have right now.

None of this is to discourage anyone from making these kinds of deals, but the biggest mistake we see is that both parties fail to thoroughly understand the risk and implications of the move. This is especially pertinent for CEOs or founders who are counting on their business’s continued success, and therefore, a slice of the pie as the company grows and evolves.

Understanding the inherent risk in dealmaking

If there’s one takeaway from this conversation, it’s that understanding is the most important part of any deal. That said, before initiating the process, both parties need to understand the inherent risk of dealmaking—particularly on the seller’s side.

What do we mean by this? It’s a natural part of the process to explain your company’s merits, which can include confidential information like trade secrets, your well-designed organizational structure and more. That’s not to say that buyers are all out to rip off your ideas, but it’s inevitable that they will at least have awareness of what makes your company so special. Even if your buyer signs an NDA, you can’t expect them to purge all information from their brains after your deal, whether it was successful or not.

With that in mind, be mindful and do your research before starting the negotiation process. Know that a vast majority of deal sheets never come to fruition, so choose your potential buyers with intention and care.

Another thing to consider is the time and energy you’re spending during the process. This will eat up a ton of time for both you and your team. Bringing in advisors (which we’ll cover below) will also come with monetary costs. Before you initiate anything, weigh the cost of these items and understand if the risk is worth the reward.

Consider the “what ifs”

Taking stock of every little thing that could go wrong is typically very bad life advice. But, in the dealmaking world, it’s something that could lead to a successful transaction—or a successfully dodged bullet. Cover all of the hidden angles of the deal, and recognize that you are guaranteed to have blind spots going into the process. Because of that, we recommend always bringing in a third party to help you identify potential flaws or traps outside of the deal papers.

Bring on a trusted advisor as a fresh set of eyes to examine the situation and provide opinions you may not have considered. It can be easy to get caught up in the emotion of the process, so having a trusted, neutral party to assess potential shortcomings will help you navigate each step from both your perspective and the other party’s point of view.

Most importantly: Align the risk with the reward

The biggest point we want to send you off with is to fully understand what you’re giving up and what you’re getting in return. Really understanding this takes patience, outside help and plenty of time, and it’s not an easy thing to accomplish. And that’s why a majority of deals never happen!

If you’re selling, you need to be properly compensated for your business. And if you’re on the investor or buyer side, understand what you’re bringing to the table and whether the purchase will burden you or will pay off in the end.

As you can see, there are so many things to consider before entering into the deal-making process. If you need an outside perspective, our team is always here to help guide you so you can easily mitigate—and understand—the risks of the deal.