Just like marriages, business partnerships often run into rough waters. To ensure your partnership stays on course, follow these tips.
Forming a strategic partnership or alliance can be a smart way for a small business to increase awareness, gain new customers, expand to new markets, boost sales and grow.
What is a strategic partnership?
A strategic partnership is an agreement between two (or more) companies to work together to benefit both businesses. Strategic partnerships are a common arrangement practiced by businesses of all sizes. Big corporations regularly form alliances, like the arrangement between Starbucks and Barnes and Noble forged 30 years ago.
One of the best aspects of strategic partnerships is that businesses can take advantage of them at almost any stage. And the partnership doesn’t have to be between companies of equal sizes. Small businesses can partner with large corporations. However, typically you should avoid forming an alliance with a direct competitor.
Types of Strategic Partnerships
Before creating a strategic partnership, you need to know which type of alliance would most benefit your company. The Corporate Finance Institute (CFI) says there are three types of strategic partnerships or alliances:
- A Joint Venture is when two businesses (“parent” companies) come together and form a separate company. According to CFI, if each “parent” company owns 50 percent of the newer business, it’s a 50-50 joint venture. If one company owns more of the new business, then it’s called a majority-owned venture. Another form of a joint venture is when two businesses come together to accomplish a common goal. The expenses and profits are typically split between the two companies.
- An Equity Strategic Alliance is when one company purchases equity in another business.
- A Non-Equity Strategic Alliance is when two companies (or more) form a contractual relationship to pool their resources and capabilities.
Those are the more formal legal types of strategic alliances. But there are less formal types of partnerships your small business can form. For example, companies can form marketing alliances and promote one another’s products and services. This can be as simple as a daycare company partnering with a children’s clothing store or a landscape designer working with a real estate company.
Strategic partnerships have many advantages for small businesses. CFI notes that they create value by:
- Improving current operations
- A successful strategic alliance can create economies of scale
- The ability to learn from the other partner
- Risks and costs are shared between partners
- Ease of entry and exit
- A low-cost entry into new industries
- A low-cost exit from industries (A new entrant can form a strategic alliance with a company already in the industry and slowly take over that company, allowing the company already in the industry to exit).
Of course, as CFI points out, some challenges may arise from being in a strategic partnership:
- Partners may misrepresent what they bring to the table.
- Partners may fail to commit to the promised resources and capabilities.
- One partner may commit heavily to the alliance while the other does not.
- Partners may fail to use their complementary resources effectively.
To avoid these challenges (and any others), it’s essential that you vet your potential partner thoroughly. And make sure you ask an attorney you trust to draw up or review the legal paperwork.
Making a Strategic Partnership Work
Here are some tips for forging a successful business relationship:
- Get your house in order. Before forming a strategic partnership, your business finances, employees, systems, and processes must run smoothly. A strategic alliance isn’t a remedy for problems in your business; on the contrary, it will bring them to light.
- Determine your goals. What do you want from a strategic partnership? Do you currently sell products regionally and want to partner with a company that has a national sales team to expand your reach? Do you want to offer your customers greater convenience, such as restaurants that partner with a food delivery service to deliver their meals? Do you want access to new manufacturing methods, technologies or expertise? Knowing what you want from the relationship will help you decide which potential partners to approach.
- Identify potential strategic partners. You’ll want a partner that has different strengths than your business. And look for companies that not only have what you need to achieve your goals but also share your business’s core values. This makes for smoother sailing in the partnership and makes more sense from a branding standpoint. For example, if your business is devoted to social responsibility, you’ll want to ensure your strategic partner shares the same commitment.
- Do your due diligence. Before approaching a potential strategic partner, check the company’s reputation online, on social media, and among other businesspeople. How strong is their brand? It's also a good idea to contact businesses the company has partnered with before and ask about their experiences working together.
- Get to know each other. Once you identify potential strategic partners, work your network (online and real-life connections) to get introduced to key decision-makers. Before you pitch a partnership, take the time to build a relationship. Learn as much as possible about the business’s current situation, plans and long-term goals. This will enable you to identify opportunities and verify that the company is genuinely a good fit as a strategic partner.
- Make it a win-win. Once you’re ready to proceed with a strategic partnership, create a proposal emphasizing how this relationship will benefit the other company. Of course, it will also help you, but that’s not what interests them most.
- Negotiate terms. There’ll undoubtedly be some negotiations as you work out the details of the strategic partnership agreement. No matter how well you know your strategic partner, always create a formal legal agreement to avoid misunderstandings. (This also protects you if your contact at the partner company should leave.) Your contract should detail the nuts and bolts of how the partnership will work. This might include which assets and resources each company will provide, how each firm will be compensated, who is responsible for what, and how the partnership’s success will be measured.
- Keep the lines of communication open. A strategic partnership isn’t something you can “set and forget,” so don’t just sign a paper and return to business as usual. Both sides must commit time and energy to the partnership to succeed. Communicate consistently, hold regular meetings to review the results of your collaboration, and make any necessary adjustments.
Forming a strategic partnership can be the boost your small business is looking for. To give the partnership a better chance to succeed, be open, honest, and transparent with your partner and make sure each of you focuses on the strengths you both bring to the alliance.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.