Acquisition or Strategic Alliance?

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You could assume that as an M&A expert I’m in the business of acquisitions. But I prefer to say that I’m in the business of external growth. Sometimes, growth is served by taking other routes than acquisition. One of those can be a simple strategic alliance, which can play a useful role in expanding opportunities — within limits.

Suppose you see the need to expand your customer base, but you have hit a ceiling with your current marketing and sales effort. One step you can take is to form an alliance with a partner who is serving the customers you seek with a non-competing product. You can structure the arrangement in countless ways. Perhaps the partner benefits from simply being able to expand his offering; perhaps you pay a commission on sales or leads; perhaps it is more of an exchange, whereby you simultaneously market your partner’s product to your existing customer base.

The appeal, but also the risk, of such an arrangement lies in the absence of equity investment. This means that neither party has an ownership stake in the outcome. Of course the legal contract of the alliance can have everything nailed down beautifully, but there is a significant difference, in terms of energy and commitment, between a legal obligation and a true business commitment.

The strategic alliance tends to the character of a one-night stand, and in fact I advise my clients to restrict such alliances to short-term agreements. I also like to see alliances focused on very specific and limited objectives, such as securing a better network of representatives. With these caveats, the alliance tactic can deliver tangible benefits.

Nevertheless, the question is bound to arise at some point in the relationship: What next? If the alliance falters, the obvious outcome is to withdraw at the end of the contract. But what if it goes well? There may come a time when you will be trying to figure how to get up to the next level, with some kind of equity involvement. I like to address this issue right from the beginning and write into the contract an option for equity purchase if certain conditions or benchmarks are achieved.

Giving the agreement more teeth may take some extra effort at the start of the relationship, but it will open the door to substantially greater benefits in the long term.

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