Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Companies that focus on growth, expansion or diversification often find these strategies require a considerable financial and time commitment. The good news is you can achieve your goals in ways that are cost-effective and low risk by partnering with another company in the form of a strategic alliance.
In its most basic form, a strategic alliance is a collaboration between two businesses whose products or services are complementary and that serve similar markets. For example, several years ago Costco and American Express entered into such an arrangement for the purposes of achieving growth and increasing profitability. Since both companies focus a significant portion of their marketing efforts on attracting and serving the small-business segment, this arrangement made sense.
Costco began accepting the American Express card at all its retail locations, thus increasing the size of the average purchase. American Express gained access to the Costco customer base for the purpose of offering card memberships, auto and home insurance programs, and travel privileges at favorable rates. Both companies benefitted from increased sales, and Costco customers were able to enjoy the convenience of using a credit card at the cash register in addition to new membership perks.
Minimizing risk
When executed correctly, a strategic alliance can be a win-win scenario for small businesses. Not only can it provide a cost-effective way to grow and expand, it also does so while minimizing risk. Since neither company is investing in a brand new initiative with uncertain results, the cost-benefit analysis is much more favorable than going at it alone.
What are some of the key advantages of entering into a strategic alliance?
What are the criteria to consider before entering into a strategic alliance?
First, the companies should be of somewhat similar size in order to ensure the potential benefit is equal in impact. For example, a massage therapist and a chiropractor may agree to leverage each other’s client lists for marketing purposes. Since both companies are similar in size and they serve a similar market, they can mutually benefit without competing against each other.
Happy arrangements
Second, you should consider a company whose products or services are complementary to yours. A brand new painting company may partner with an established local builder and offer its services at a discount in exchange for a guaranteed number of projects per month. The painting company benefits from new business and the builder is happy to be guaranteed availability and prompt scheduling for construction projects.
Third, the arrangement should focus on growing or maintaining a key core competency or competitive advantage. A supply chain management consultant has the ability to provide solutions to clients’ problems. While assisting clients with operational issues, often team or leadership concerns come up that impact the company’s ability to function successfully.
A strategic alliance with an executive coach who specializes in human resources and leadership training makes sense. The consultant can now provide more value-added services to clients and the coach benefits from new referrals.
How do you set up a strategic alliance?
Step 1: Establish one or two key objectives that will be supported by the partnership. Goals may include anything from expanding your market, increasing sales or productivity, improving profitability, lowering expenses, or acquiring technological expertise. It is a good idea to establish numbers or metrics around your objectives; this will allow you to evaluate the success of the partnership later on.
Step 2: Determine compatibility factors. In other words, how will you know if a potential candidate would be a good partner for your company? What will you need to see in order to move forward with a proposal?
These criteria are usually specific to each company and its owner, but it is helpful to look at a company’s culture, management style, decision-making process, operational structure, company values and the personality of the CEO and key leaders. “Soft” factors are just as important to consider as a company’s product offering, reputation or financial stability.
Step 3: Using the criteria you identified above, begin assembling a list of potential candidates by scanning your existing professional network, such as industry groups, organizations and associations. Expand your search by reaching out to your trusted business advisers, such as your CPA, commercial lender, attorney or consultant. As a general rule, these individuals are well-connected and can provide valuable referrals. Gather as much information about each candidate, especially around your established criteria. Disqualify any candidates that do not meet your needs, and rank the remaining ones in order of compatibility and desirability.
The top three
Step 4: Select your top three candidates and begin the negotiation process. In order to do this, you should determine which factors are non-negotiable (must-haves) and in what areas you are willing to compromise. This is important because all business transactions of this sort entail some give and take. Then develop a proposal outlining the key advantages, terms and conditions of such a partnership and approach the potential candidate.
Step 5: Depending on the complexity of the alliance, have an attorney draft or (at a minimum) review the final document. While the details can be discussed and agreed upon between the two parties, do not sign the contract without thorough legal review.
Once you have entered into a strategic alliance, it’s important to go back to the success metrics you established and regularly assess the effectiveness of the partnership. If you find that your bottom line is not moving as expected, consider ending the agreement. On the other hand, if things are working well, you can look at building additional strategic alliances that will support the growth and long-term success of your company.
