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Being Comfortable with Risk

the dice of risk

 

Recently pathfolios sat in on a business discussion as an observer. It was a transaction that involved a vendor (owners) wanting to sell their stake in a bunch of property. Afterwards listening to the initial discussions pathfolios' first impression ended with a conclusion that there was elements of risk involved in the transaction. 

This article is business orientated but it tries to demonstrate a practical point as well :)

The Facts
The company had a market valuation of six hundred million, it was looking for buyers and it was willing to sell for three hundred and ninety million. Despite there being 5 interested buyers the company was still willing to settle for the drastically reduced price, first in first served. It had around 100 million worth of cash in hand so realistically it would only cost two hundred and ninty million and most of the value came in property assets and lending lease agreements. Due diligence (a process of checking the figures matched up) was performed with no red flags with a business offering a fifty two percent discount! Despite the vendors being very keen to sell there was nothing else "suspcious": ownership was verified, there were no pending acquisition of land, contracts for lease had short and long term agreements and liabilities of the company only related to employee benefits. The business had positive prospects.  

The Problem
For anyone, including those in a business degree, this kind of transaction would raise serious alarm bells. It is not the presence of anything bad but the absence of risk! Something is not right whether it be hidden legal, economical or ethical reasons. It's not entirely ridiculous that trusting someone on something too good to be true, is it?

Real World Business
Being suspicious is good. It is unfortunate business is full of faux promises however these dangers need to be balanced when opportunities are presented even if they are "too good to be true". You can't spend time looking for something that's not there.

In textbooks and classrooms there is common sense. How could anyone not have seen Enron's collapse with those outrageous financial figures or the HIH Insurance horror story. These "too good to be true" indicators are drilled into us to distrust and it takes real skill to differentiate when to take on risk or allow it to pass. A window exists and we've been too afraid to give things a try. You could be losing dearly for accepting the distrust we learn about and not take the chance because in life you consider yourself lucky to have one chance and that window doesn't come often and it doesn't stay long.

Summary
Don't be afraid of fairytale situations but approach with caution.

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