In her book, “Alpha Dogs” (Collins, 2005), author Donna Fenn states that “every year, 10% of small businesses-a half million (in the US) or so-shut down for good; a quarter of all businesses never make it past their second year; 60% close after six years.” The statistics are higher in Canada.
Yet, even as small and medium-sized enterprises (SMEs) face these odds, there’s never been a better or more exciting time to be a small business owner, or a more critical time to begin transforming your company into a leader of the pack.
However, successful small business owners are realizing that if they are going to make it, they are going to need help, and one of the places they are finding help is through the formation of small business alliances.
Small- to medium-sized enterprises (SMEs) are faced with an increasingly challenging external environment due to rapid technological evolution, globalization, and progressively sophisticated competitors. For firms with minimum resources, the challenge of building competencies to survive and prosper in this new setting is difficult but attainable with suitable investment decisions.
Despite the prevalence of the big box retailer chains (i.e., Wal-Mart has 5% of the total U.S. retail sales market), there has been a growing widespread backlash among consumers to what Ms. Fenn calls these larger retailers’ “predictability and conformity”. It appears that across the United States, SMEs are creating vibrant new alliances and partnerships to be not only competitive with the Wal-Marts of the retailing world but also to attract local consumers who are showing signs of being receptive to the more civilized selling attitude of the smaller business.
In her book, Ms. Fenn outlines the saga of a Boulder, Colorado, bookstore owner named David Bolduc formed a local alliance of small businesses with community activists Jeff Milchen and Jennifer Rockne in 1998. By 2000, the Boulder Independent Business Alliance grew to more than 160 members, and attracted so much national attention that the founders also launched the American Independent Business Alliance (AMIBA) to provide advice and a template to other small business communities seeking to form similar affiances. “In our first two years, we had 120 inquiries,” says Rockne. “The idea really caught fire.” Since then, AMIBA has helped start twenty affiances that represent thousands of small businesses.
However, many SMEs do not directly control sufficient resources to make the necessary investments, and so may find themselves at a competitive disadvantage relative to their larger rivals. In an effort to build competencies necessary to navigate a profitable course in this demanding environment, SMEs may investigate the possibility of leveraging strategic alliances.
There are many reasons why owner-managers avoid decisions on growth, including concern of engaging debt and lost of personal control to professional managers. Other major barriers to SME growth are found inside the business, including lack of technical and managerial skill, inadequate organizational adaptability and ability to acquire or use technology.
This lack of perceived and real lack of resources for sustained growth by most SMEs leads to the thought that substantial benefits may be acquired through the development of partnerships or alliances with other businesses, sometimes in the same industry, available to provide these skills.
A PWC study of 400 high growth small firms found that those with strategic alliances experienced growth rates 20 percent higher than firms without such alliances and about 11 percent more sales turnover (“Small Business Reports, 2006).
Strategic alliances enable founding owner/managers to gain competitive advantage through access to a partner’s resources that include markets, technologies, capital and people.
Furthermore, it is important for founding owner/managers to keep in mind that family ownership creates value only when the founder serves as the CEO of the family firm or as its chairman with a hired CEO. This point has been borne out by recent research conducted by the Wharton School of Business at the University of Pennsylvania. Thus, creating partnerships and alliances while maintaining a direct link to management control is the preferred choice.
For most SME owner-managers, the task of identifying suitable partners or alliances can seem daunting. As these small businesses grow and the owner-managers realize the importance of accepting new professional managers and expertise, this realization now extends to the acceptance of engaging skilled, experienced and knowledgeable mergers and acquisition intermediaries to facilitate the search and acquisition, and to ensure that the new arrangements are a win-win situation for all parties.
As an experienced, skilled mergers and acquisitions (M&A) broker, I know the daunting pitfalls and obstacles that can emerge to frustrate new strategic partnerships or acquisitions. One of the delicate tasks is to identify the appropriate partner, not such an easy chore as it may appear.
Choosing a partner for business is as complex as choosing a partner in marriage. The shocking stats are that 70% of all partnerships don’t make it. Therefore, it is important for you to know as much as possible about each other at the outset. Just like in a marriage and life in general, there will always be situations and times you could not have predicted. Having a skilled Adviser help you develop tools for communicating and dealing with the business while tempering emotions and diversions of attention is a wise and cost effective insurance on your financial and emotional investment.
Ideally, strategic partners and alliances can provide extended markets, sales and distribution networks and financing capabilities without giving up ownership. For the new partner, the agreement can access new products and services for that partner’s growing need for expansion, hopefully for all on a global scale, and encouraging the development of more robust Canadian global business leaders. Canadian business people need to go out and network and form more alliances.
By: Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a company that specializes in the sale of privately owned mid market companies. Mark can be contacted in confidence at (416) 368-8466 ext. 232 or firstname.lastname@example.org or www.mercantilemergersacquisitions.com