Even if a sale is not currently on the horizon, business owners may benefit from considering who an eventual buyer might be. Sophisticated acquirers typically assess more than financial results alone; they also consider how a company complements their broader long-term strategy.
Entering into a strategic alliance can be an effective way to strengthen current profitability while also expanding future exit opportunities.
Current and long-term objectives
Strategic alliances are structured in several ways, including joint ventures, revenue-sharing arrangements and co-development agreements. In some relationships, the two companies simply agree to work together on a particular project. Others involve long-term agreements, with the end game being a merger. Alliances can have set expiration dates or be renewed at intervals after they pass performance reviews. Among the many reasons companies pursue alliances are to leverage core assets, expand sales capacities and reduce operating costs.
Your company does not have to enter into a strategic alliance to make it easier to sell one day. It may, after all, be performing well on its own. Instead, look at a potential strategic alliance as a near-term growth and expense-cutting mechanism with long-term benefits.
If you agree to an alliance, focus on financial and operational objectives, including achieving economies of scale. For example, by combining orders for everything from raw materials to office supplies, both partners may qualify for supplier discounts and reduce overhead costs. What about jointly purchasing capital equipment or upgrading both companies’ IT networks? Or you may want to find a partner to improve transportation logistics by consolidating warehouses. Another idea: Sharing intellectual property, such as customized software.
Keys to success
Your strategic alliance may require time and effort to get up and running. But if you have thoroughly vetted your partner and have a well-structured agreement in place, you’re likely to realize benefits. If you don’t, and the relationship becomes a drain on resources, take immediate action.
Some problems can be fixed. For example, it is easy for alliances to drift from their original purpose. A partnership forged mainly to upgrade an IT system could wind up focusing on improving employee productivity instead — with mixed results. In this case, the partners could refocus and reinforce their alliance objectives. But if problems seem intractable, it is usually better to terminate the alliance.
Profitable arrangements
Not only can strategic alliances be mutually profitable, but they can help both partners envision a permanently combined company. Alliances often begin informally or as short-term agreements that eventually lead to mergers when the companies realize their synergistic potential.
A successful prior relationship can smooth the merger process. Before joining a strategic alliance, companies typically conduct due diligence on one another. Financial and other conditions can certainly change between the initiation of a strategic alliance and the beginning of merger negotiations. But a well-structured alliance allows partners to keep tabs on each other. If one of the companies experiences leadership challenges or has trouble getting financing, the other is likely to know about it. Such knowledge can speed up the merger transaction process and simplify integration.
Exercise in discipline
Even if a strategic alliance does not ultimately lead to a merger, the discipline involved in building and maintaining the relationship can enhance operational performance and expand your company’s market presence. It may also improve financial transparency and make the business more attractive to prospective buyers. Please contact your Rudler, PSC advisor to discuss how we can help refine your financial goals, assess potential alliance partners, and support your long-term exit planning.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Brandon Hughes, Senior Accountant and Megha Pandya, CPA.
If you would like to discuss your particular situation, contact Brandon or Megha at 859-331-1717.
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