Businesses looking to upscale should consider forming a business alliance as an alternative growth strategy.
Alliancing, or outsourcing as it is more commonly known, is being used more frequently as a method of addressing the ongoing need for a business to grow and evolve while managing increasing costs, including labour.
One of the main benefits of alliancing is that it allows you to expand your service offering and leverage off a complimentary partner’s clients, products and services while maintaining your own core business focus.
There are three main types of alliances you can set up:
1. Transaction-based alliance
Under this alliance you and your alliance partner refer business to each other and you each go about doing the work separately without sharing any revenue. This is a loosely formed arrangement.
2. Income alliance
Income alliances are a more formal arrangement, best suited to businesses that want to add value to the services they offer and grow revenue at the same time.
They involve sharing income between the two businesses, with an agreement is entered into that sets out how income will be shared as well as the amount and timing of payments.
3. Capital alliance
This alliance requires a higher commitment to the relationship with your alliance partner but has the potential to provide higher and longer term returns.
It involves the creation and sharing of capital and ongoing returns, with the alliance established via a separate entity with a joint venture agreement between the two parties.
Before pursuing a business alliance there are a couple of issues and questions you should consider:
Be clear about your objectives
Why do you want to enter into the alliance? What are the commercial opportunities? Why can’t you provide the additional services?
Understand as much as you can about the other business
What do they do? What is their full range of products and services and how do they offer them to their clients? What is their target market and plans for developing it apart from the alliance?
Make sure your businesses complement each other well
Are your business objectives aligned? Are you entering into an arrangement with likeminded business owners? Do you share the same ethics and values? Will the staff and cultures of each business complement each other? Do you have similar views on how you conduct business?
Align your expectations from the outset
What does each party expect from the alliance? What will you expect from each other? Who will perform what role? How are you going to ensure that you meet expectations? What are you going to do if they aren’t or can’t be met?
Check that the alliance makes sense financially by conducting a cost/benefit analysis. What time and financial investment do you need to make for the alliance to work? What return do you expect for that investment and in what timeframe?
Confirm your understanding in writing for formal alliance relationships
When will you commence the relationship? How will you go about pursuing client opportunities, managing client targeting and relationship management in a co-ordinated fashion?
What are the terms of financial management, splitting costs and sharing the financial rewards? What are your financial, legal and compliance obligations, and who will manage them? How will you keep each other informed of progress? How will you manage termination of the arrangement?
Treat the alliance arrangement with the level of care and consideration that you would if you were starting up a new business or taking on a new business partner during the early stages.
That will help you to establish the arrangement with greater comfort and confidence, and ensure that you have the potential to achieve the growth and returns you expect.
Marc Peskett is a partner of MPR Group, a Melbourne-based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises. MPR Group is a member of the Proactive Accountants Network. You can follow Marc on Twitter @mpeskett