What is legal risk?

There are many definitions associated with risk and legal risk, but the simplified notion is the same: it’s about being prepared for unexpected events and, in the case of legal risk, legal events.

Legal events can potentially impact all functions of a business, from real estate to customer and supplier contacts, to employment, distribution, product development, marketing and finances. Such events could include new laws or compliance requirements, changes in current laws, product diversification, employee numbers or turnover triggering the application of current laws, defending or enforcing contract claims to taking action to protect core assets such as intellectual property.

The precise legal risk profile of a business will vary according to the bespoke nature of its industry/ product/ service mix, clients, supply chain and strategic intent.

Wide scope of legal risk

Even if legal risk is a separate category on the risk register, because of the breadth of the topic, the detail of certain aspects of legal risk may be picked up through overlap with other “risk” aspects of a business. Depending on how the business is structured and its risk management policies, the nature and extent of that overlap will vary. (For example, there is a common overlap between commercial risk and legal risk or asset risk and legal risk). This is not the place to deal with overlaps, but suffice it to say that consistency is key, and it’s usual to include an approach to this in an overarching risk management policy).

What is the Bird’s Eye View of Legal Risk?

A bird’s eye view of legal risk is an analysis of risk across all aspects of the business from a legal perspective. The legal analysis is the exercise’s primary purpose as opposed to being picked up “piecemeal” at a secondary level as an element or mitigation of other risk categories.

Because of the overlapping nature of legal risk, a strategic analysis of the legal risk profile of the business may be overlooked. But, that should not belie its importance and here are five good reasons why:

5 Benefits of the Bird’s Eye View of Legal Risk

1. Reduced legal risk.

The Bird’s Eye View of Legal Risk often picks up matters that may otherwise fall through the gaps. For example, in our blog Getting into shape for Exit, we talk about an agency agreement missing a crucial term fundamental to the increased risk of terminating agency agreements (which was massively mitigated with a single clause).

2. Pre-exit preparation.

When it comes to selling a business, legal risk becomes VERY important. Key questions of prospective buyers or investors will, among other things, be aimed at assessing the level of legal risk that the buyer will be “inheriting” (Getting into shape for Exit). For anyone who has been through it, it’s tough. So, getting things in place with time on your side makes a lot of sense and also ensures that any “gaps” are identified and rectified/ mitigated before the formal process starts. The agency contract example in 1. above is a case in point. If this were identified as part of a pre-exit preparation exercise, there would’ve been time to consider options which may not otherwise be available (e.g. issuing new agreements / re-negotiating).

Although there are other aspects to due diligence, a bird’s eye view of legal risk is an ideal place to start the process because it flows through every part of the business.

3. Strategic outsourcing.

Whilst some aspects of legal risk mitigations are traditionally outsourced (e.g. data protection compliance, drafting terms and conditions of sale or purchase), these individual components of legal risk do not give the bird’s eye view of the entire legal risk profile of the business. Outsourcing certain components of legal risk is not the same as compiling the full legal risk picture. Until the bigger picture is understood, outsourcing decisions may be more of a piecemeal response rather than a full protective shield.

4. Peace of mind.

“Not knowing what you don’t know” is the niggle in the back of a Director’s head: “Is everything covered?”. The bird’s eye view that lies over the more detailed risk register is the security blanket that eradicates that niggle.

5. Quicker decisions.

Peace of mind that it’s covered paves the way for quicker, easier, and more informed decision-making at a strategic and operational level.

Having the bird’s eye view of the legal risk profile of a business will place Directors of SMEs in a better position to make informed decisions at a strategic level on the allocation of resources internally and externally whilst bringing peace of mind and added value daily, whether or not that is part of a pre-exit preparation exercise.

Lawpoint provides several legal risk services and solutions for SMEs. If you want to learn more about the services we provide to support legal risk, please call Tracey on 01202 729 444 or e-mail tracey@law-point.co.uk.