Entering Business Combinations: Strategic Partnerships, Mergers or Joint Ventures - Part 1

Business Combinations - mergers, strategic partnerships or joint ventures typically have big impacts on companies.  Some transactions propel companies ahead while other similar transactions cripple them – they stagnate, leadership becomes unclear and both parties start reviewing the exit provisions of the transaction documents.  After watching deals succeed and fail over the years, I began to ask myself, what are the common threads?What questions can you ask when you and your leadership team are evaluating potential strategic alignments and determining whether you should move forward in considering the transaction?  The following blog posts will dig a little deeper into the following four areas: (1) Alignment of Character/Business Philosophy; (2) Human and Physical Assets; (3) Market/Product/Reputation; and (4) Financial Health.  Clearing these hurdles, or at least understanding these four hurdles, will make it more likely that you move into negotiating a transaction.

The first main point I will discuss is alignment of character and business philosophy.  This assumes that you know and can articulate the underpinnings of your company’s value system.  If you have not articulated your company’s values – stop now and do it.  If you know your values cold, you first need to explore whether your company and the target company have aligning character and business philosophy.  The following are some questions to ask a potential business partner:

1. What are the top priorities with products?  It is important to gage the business’ top priorities in order to compare them with your own.  Pricing and quality are two very good examples of these priorities.
2. Why did they get into the business?  If a business owner does not have good reason as to why they started a business, they probably do not have good reason to stay in a business.   Find out what drives a person to keep their business thriving.
3. How do they invest in and treat their employees?  A business cannot efficiently run without satisfied employees.  Explore what they have to offer their employees, the longevity of their staff and how they recruit employees.
4. What is important to leadership outside of their company?   Personal life can weigh very heavily on work life and they sometimes go hand-in-hand.  Learning the values and morals of their personal life is a good reflection of their business life.
5. What is their long-term v. short-term view?  Finding out whether an individual is in the business for value creation or quick returns of cash will help you determine how vested they are in the business.  If their views are mainly short-term, it may not be in the best interest for you to invest in their business.
6. Do they have a cheap or frugal mindset?  Does leadership just not spend money or are they careful stewards of the resources of their business? The overall look and upkeep of the facility is a good way to define a business owner’s mindset when it comes to spending money.
7. Do they meet regulatory standards with their products?  Are they involved in the regulation of their industry or see it as a nuisance? Are they proactively pursuing best practices?
8. Do they have interaction with competitors within their business market?  It is very important for a business to be aware of competitors and their success.  A competitive attitude is key when it comes to being number one in the industry, and knowing the competitors is a great way to gage the potential success of the business.

Brainstorm other questions, meet with the leaders in a relaxed environment and weave these questions into the conversation.  You are more likely to get more open feedback when people are relaxed.  Then spend some time writing out the answers you heard – where do you see alignment and where do you see that values and business philosophy are not conforming?  Dig into those areas.  What do you need to verify?  What makes you excited?  What gives you heart burn? 

As outside general counsel to growing companies, we sit in on and participate in these discussions frequently.  We are close enough to your business to know you and your value system yet far enough away to bring perspective to the conversation.  If you are considering a business combination transaction such as a merger, joint venture or strategic partnership and need counsel, please contact us.