The other side: the counter-party
In a transactional relationship, the other party to -- or participating in -- the transaction is your counter-party.
Oh! And don't forget the money: there may be financiers of the business or project which have a counter-party relationship to the project.
Fair enough. But now comes counter-party risk: the risk that the other party to the transaction, or perhaps you yourself, will not be able to hold up their side of the transaction.
About counter-party risk
So, you are about to enter into a transaction with another party. What might be the risks?
- Trust: you may not know the other party well enough to convey trust, a willingness to believe what they say without the protections of a written agreement.
- Ability to perform their side of the transaction may be in question. Do they have all the requisite tools, resources, and experience? Is something required of you in order for the other side of the transaction to be completed?
- Willingness to perform their side of the transaction when the whole deal comes under stress may require backup
- Lead, or being led? Really, who's in charge in this relationship? Can you say you really understand what you are getting into? Warren Buffet famously said words to the effect: 'I never invest in businesses that I don't understand'
- You might be able to trust if you can verify: Observable, measurable evidence that your counter party is doing their end of the bargain
- Your strategy should be to keep the counter-party fully engaged with intent to fulfill their side of the bargain.
- Your tactics should be to put in place standard risk management tools: Written agreements with incentives and penalties, and opportunity to observe and measure; sober assessments of their track record on similar activities; and perhaps insurance for consequential damages if the counter-party fails.
- Always have Plan B in-hand: what if the counter party fails? What then? Can you exist or terminate the transaction?
- Are the terms spelled out for mutual agreement? Is it 'liquid' or is there a timeline for exit that has to be accounted for in planning?
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