Risks and Liabilities: Injuries Are Not the Worst Liabilities in Pro Sports
In this excerpt from Monday Morning 8 a.m. newsletter, issue #9, we are addressing some liabilities and risks in business. But first, let’s define what is a business risk and what is a liability in business.
What Is Business Risk?
Business risk is the exposure a company or organization has to elements that may lower its profits, may result in some other negative impact for an organization, or which may even lead to organization’s failure and demise. Anything that negatively impacts organization’s ability to achieve its financial and other goals is considered a business risk.
What Is a Liability?
A liability in business is something an organization owes, usually in monetary value. Liabilities are recorded on the right side of the balance sheet. Liabilities include loans, accounts payable, warranties, mortgages, etc.
Pro Sports and Liabilities
An article from The Financial Times provides a good summary of private equity firms and American billionaires who are trying to buy into pro sports like Formula One, soccer, football, and rugby. Even Ryan Reynolds, the A-list actor, has bought a football team in the United Kingdom.
Whenever you’re doing any acquisition, you have to decide what you’re buying and what you’re excluding from the purchase. When you know that—both on an asset and liability side—you know what to insure against and what to insure for. If you decide you are not exposed to a liability, you will not be insured for that.
The problem with a lot of the purchases taking place in professional sports is that they aren’t thinking about future liabilities. There is almost certainly going to be a discussion about concussions in rugby, football injuries and any motor sport that emits toxic gases into the environment. If those discussions take place, someone’s going to start assigning liabilities at some point.
As companies go through this huge ramp up in investments in pro sports, the deep insight is: Are they doing due diligence in understanding the risks and liabilities that may be coming down the pipeline in 5-10 years? You can look at big tobacco. I am not comparing pro sports to bit tobacco. But what I am saying is there’s a lot of precedent for not seeing a liability and not taking it seriously because not enough people thought it would become mainstream. Big tobacco struggled for many years to convince the world that they were not responsible for those liabilities. The man who took on big tobacco and orchestrated the entire campaign to bring them to heel is going to be a guest on season 3 of the Bill Matassoni show to talk through the strategies and the tactics they deployed.
Investigating liabilities when acquiring an automotive company
If you’re a FIRMSconsulting Insider and visit the electric car startup program, you will see the very detailed and painstaking process we used when acquiring an automotive company that had some of the core capabilities we needed to build the business. In that case, we worked with a well-respected audit company to help us with the due diligence. But because we weren’t their biggest client in terms of revenue, in many situations, we’d get the results back from the audit team and ask, “Did you check this document? How did you check this document?” And they’d say something like, “Well, the company gave us copies of it. We said, “No, nothing you are auditing must come from the company you want to acquire because it’s human nature for them to try to present things in the best light. They’re not necessarily doing anything wrong, but they’ll try to make themselves look good.” That’s the level of detail you need to have when you’re assessing the liabilities you know. Can you imagine the deep difficulties when you’re assessing the liabilities you don’t know?
A strategy has an embedded risk in it
It’s always assumed that the biggest risk is risk of implementation. That’s not true. A strategy has an embedded risk in it—no matter how successful the strategy is. If you successfully invested all your money in tech companies, you wouldn’t be able to avoid risk because all your eggs are in one basket. It’s not risk of execution; even if everything went right, there is a level of risk. On the other hand, if you went for a very diversified portfolio and tech stocks went down, something else would go up and balance it out. In that situation, your risk is obviously different from the risk of the strategy of investing everything in only tech stocks.
In every strategy you take, there’s risk. You need to think about how to calculate that.
For FIRMSconsulting Insiders who have access to SLIDES, we are going to be putting up something about that in a one fo the updates, and it will be one of the most important studies we’ll be releasing.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #9.