Alliances can be beneficial or troublesome

A client recently asked for advice about the opportunity to partner with a larger company.

The arrangement looked promising on the surface and the other company was pushing for it, insisting it could be a strong union and a win-win situation. But there were also red flags, warning that this particular alliance carried considerable risk for our client.

Alliances can be powerful vehicles to create success for both companies, but they also carry risk. Care needs to be taken to examine both possibilities.

The Old Testament book of Ecclesiastes says, “A cord of three strands is not quickly broken” — meaning alliances form strength. Just as countries form alliances for mutual benefit and greater strength, the same applies to business. The concept of alliance is the basic strength behind franchises, for example. The parent company provides tools and resources, the franchisee sells product, and everyone is supposed to win.

In other types of business alliances, companies join together in “joint venture” situations, where each brings something valuable to the table to benefit both parties. You might have a strong client base while another company has proprietary product, and the combination could prove powerful for increasing sales for both businesses.

Collaborating with a giant in your industry is another example. It gives the larger company inroads into the local market while providing you with greater resources — like marketing and technical support — than you could afford on your own. It can also increase your company’s stature and credibility.

You might want to ally with a potential “suitor” — someone who might someday buy your company or want to merge with you. Partnering gives a potential purchaser a clearer picture of your business and, in the case of a possible merger, lets you test the waters to see how well you work together as a team.

Another alliance option is collaborating with a business in your own industry located in a non-competing market. Since you both understand your industry, you can exchange ideas, share resources, or combine marketing dollars to get more bang for your respective bucks.

Now, let’s talk about protecting yourself from risk and increasing the likelihood of success. Alliances go further than standard business relationships and can potentially harm your business. It’s important to exercise caution to increase your chances of having a positive experience. Here are some points to consider:

First, know who you’re allying with. Years ago, we were owners in a business that was approached by a Fortune 500 company to form a partnership through a licensing agreement. The owners were all so excited about the big “opportunity” that we failed to thoroughly research the other company. We later learned it had a history of ruthless and dishonest practice, which is also how it treated us. Our business was seriously harmed, which could have been avoided if we’d taken more time to learn about the licensor.

What is each of the parties bringing to the table? Unless both companies provide something valuable that benefits everyone and your business will be enhanced as a result, there’s no point in partnering. Both parties should contribute resources and both should foresee a win-win situation.

Make sure you understand the other company’s culture. Look at how the company is run, approaches sales, treats employees, and deals with customers. Will you be comfortable tying your name to that type of operation?

Check references! Talk to the other company’s vendors, customers or licensees, check its rating with the Better Business Bureau, and research it on the Internet. Be as informed as possible. You don’t want to harm your good name by allying with a company having a bad reputation.

Talk to your attorney and accountant to determine potential legal and tax ramifications, and have a solid contract in place. The old days of sealing a deal with a handshake were nice but have no place in today’s litigious society. Determine in advance how the parties will deal with opportunities and issues that arise, and make sure you protect yourself.

Lastly, be sure both parties are thinking long-term. Most alliances don’t have an immediate pay-off and some incur early costs. Everyone should understand it will be a long-term process with long-term pay-offs, and not count on short-term profitability.

Successfully allying your business with another requires choosing a compatible, respected partner, and taking the time to learn as much as possible about the other company beforehand. If the relationship is approached carefully, both companies can benefit from the strength of the alliance and come out winners.

Laddie and Judy Blaskowski are partners in several businesses, including BusinessTruths Consulting. They are authors of The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business.