How I Think About Risk Allocation in Deal Structures
When I buy a business, one of the most important parts of structuring the deal is deciding how risk will be allocated between me and the seller. Over the years, I’ve learned that risk allocation is not just legalese; it’s the foundation of whether a deal protects me from downside scenarios or leaves me exposed.
Why Risk Allocation Matters
Risk allocation matters because it:
- Defines who bears responsibility for future surprises
- Protects me from overstated financials or hidden liabilities
- Aligns incentives between buyer and seller
- Shapes financing terms and lender confidence
- Directly impacts valuation
In short, risk allocation determines whether I’m buying stability or gambling with uncertainty.
My Early Mistakes
In one acquisition, I took on all risk by paying full cash at closing. When customer churn spiked months later, the seller had no stake left in the outcome.
In another deal, I overlooked environmental liabilities hidden in leases. I inherited the problem entirely because the contract didn’t allocate risk properly.
Both mistakes taught me that the deal structure must protect me from the unknown.
How I Allocate Risk
- Earnouts: Tying part of the price to future performance
- Seller Financing: Keeping the seller invested through repayment terms
- Escrows and Holdbacks: Holding cash until risks clear
- Reps and Warranties: Ensuring sellers stand behind their claims
- Indemnities: Protecting against specific liabilities
Final Thoughts
I’ve learned that smart risk allocation isn’t about mistrusting sellers, it’s about building alignment and protecting value.
That’s why I design deal structures that balance opportunity with downside protection.
I continue sharing my acquisition frameworks at DrConnorRobertson.com, where I explain the strategies I use to negotiate balanced deals.