Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

May 7, 2012

How Much Risk Is Too Much?

By Joseph Eneldas


In any business transfer, there is risk involved for both buyers and sellers. Unfortunately the risk cannot be completely avoided, and so, we wanted to take a closer look at the respective risk components involved on both sides.

“We try to minimize the transaction risks as much as we can,” says Achim Neumann, President of A Neumann & Associates, New Jersey, “however, obviously, each party needs to feel comfortable with the respective risk.”

We can essentially segment the respective transaction risks into two phases: pre- and post-transaction risk.

The pre-transaction risk assessment pertains more to the buy side: it represents the actual risk tolerance of a buyer. For example, comparing a long-term employed engineer or corporate employee that was recently terminated, and now looking for a business, to a “serial” entrepreneur who has owned three or four businesses before, demonstrates different risk profiles. Clearly, the former is in all likelihood better served by looking at a franchise than a free standing, start-up business.

In addition to the basic “comfort level,” there are numerous financial considerations. “Quite often we have buyers approach us that clearly stretch themselves to buy a particular business” says Mike Gersten, Director Marketing, Northern NJ & Southern NY. “Very often, we explain that there needs to be working capital and a ‘rainy day’ fund beyond the cash needed for the acquisition.”

Another more significant issue involved with pre-transaction risk applies to both parties— namely, the proper prequalification. Specifically, in our firm, a buyer has to provide detailed background information, sign a Confidentiality Agreement and provide complete financial documentation demonstrating the capability to perform an acquisition before any information is released. Unfortunately, many brokerage organizations take short-cuts during this process, eager to present a buyer.

Similar challenges exists on the sell side, requiring a thorough review of the company; a detailed interview conversation with the owner; an analysis of financials; and a properly prepared third party appraisal. Only such detailed preparation ensures that there are no surprises later on— for either side.

Once a transaction has closed, there are various post-transaction risks. On the buy side, there is obviously the risk of failing once a business has been transferred. Such failure can be due to external or internal factors.

For example, on the external side, if customers of the business have not been serviced properly and slowly started migrating to a competitor a few years prior, then the seller will have to “double up” in order to maintain customers. As a matter of fact, a change in ownership could actually be the best remedy for the business at that time. Potential other risks could include pending lawsuits, tax exposure or lack of ownership, particular, as it relates to intellectual property questions.

“Some of these external issues have been successfully addressed by introducing buyers to a highly qualified attorney.” says Gary Herviou, Director Marketing, Central NJ and Lehigh Valley, “Additionally, the proper deal and legal structure can mitigate some of this exposure.” Most prominently, the discussion about asset sale versus stock sale comes into play here.

Internally, a buyer may find that he really does not like a (purchased) business after all, or that he is not qualified to run the business despite all previous research, due diligence, and excitement.

On the sell side, the risks are quite defined, too.

Most importantly, if there is a “seller note,” as is common for most transactions, the seller has a credit exposure. This risk can be mitigated by non-business collateral, such as the buyer’s private home or portfolio, however, no seller wants to incur the costs of litigation to recuperate some of the transaction receipts.

Nevertheless, the matter is even more complicated if there are contingency payments, such as licenses on gross revenues or earn-outs based on cash flow. Setting the obvious aside—namely, the required audit capability of the seller and the seller’s trust in the buyer that proper financials are reported—the seller clearly carries a significant exposure, and is ultimately dependent on the management capabilities of the new owner.

In sum, there are a variety of different risk exposures for both sides, pre- and post-transaction. A qualified merger & acquisitions advisor can certainly help each party to define some of these risks and create solutions to mediate the risk incurred between both sides, which is one of the reasons our firm has been closing deals for thirty years and takes a premier spot among M&A advisory firms, with many pleased buyers and sellers.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or

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Eric H., Investor

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

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Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer
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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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