Growth: Hand In Glove

A partnership with a larger company can take your business places it couldn't go on its own

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Even years ago, Jordan Glatt, CEO of Morristown (N.J.)-based Magla Corp., was debating with his top managers whether to launch a line of work gloves. Magla already made gloves for household chores, so it sounded like a good idea. But Magla would get clobbered if a big player such as Stanley Works, a New Britain (Conn.) company known for its hardware and tools, got into the market, too.

Glatt decided to head off Stanley at the pass. He signed a licensing deal for Magla to make and sell work gloves under the Stanley name. Because Stanley was already selling to big box retailers, the gloves gave Magla's sales force an excuse to call on Wal-Mart Stores (WMT ) and the like.

That arrangement worked so well that Glatt has cut two more licensing deals with megaplayers. Since April, 2000, Magla has sold gloves under Procter & Gamble's (PG ) Mr. Clean brand. The company more recently inked an agreement with the American Red Cross to manufacture and sell a new line of medical gloves. Thanks to such alliances, the 85-employee company's revenues have tripled, to $100 million, since 1999. Says Glatt: "Partnerships have turned us into a new company."

A successful partnership with a big player can be a great way to grow your business. Those relationships can include joint development efforts; agreements for combined marketing, sales, or distribution; or licensing deals. No matter how a partnership is structured, it can mean a big jump in sales by expanding your distribution and product lines. And such relationships often lend a small company a seal of approval that draws new customers and encourages infrequent clients to rev up orders.

Now is an especially good time for small companies to seek such relationships. "Any industry looking for innovation is ripe for partnering, because innovation is where the small business has the advantage," says Adrian Ott, CEO of Exponential Edge, a Livermore (Calif.) consulting firm. Five years ago, for example, P&G CEO A.G. Lafley announced that he wanted 50% of new product development to come from outside sources. While formal joint ventures have fallen out of favor in recent years, other types of alliances are fair game. "Almost every large pharmaceutical company and the majority of consumer-products companies I know are trying to drive new-product development with outside partnerships," says Jonathan Hughes, a partner at Vantage Partners, a Boston consulting firm specializing in alliances. Companies in fields such as medical devices, high tech, and consumer food and beverages, where innovation and speed to market are crucial, are most open to partnerships.

Not every marriage is made in heaven. About 57% of alliances fail to meet their objectives, according to a Vantage study of 100 companies between 2004 and 2006. Hughes suspects this number is even higher for agreements that have a big size difference between the two partners. Some of the common stumbling blocks are disagreements about ownership of intellectual property, personnel changes, or a sales force that doesn't push the small company's product. But the root cause of most failures is the power gap between the big company and the smaller one. "Size matters in these relationships," says Sarah Gerdes, CEO of Business Marketing Group, a Seattle consulting firm specializing in alliances. The bigger player usually has the upper hand in negotiations. And some entrepreneurs bristle at being asked to meet someone else's demands and work on someone else's timeline.

Still, the rewards of a partnership often make the extra effort worthwhile. To increase your chances of success, you'll want to choose the right type of partnership for your company, and, of course, a good partner. You may want to work with a lawyer or a consultant who specializes in alliances to hammer out a deal that protects your interests. And once the alliance is in motion, you'll need the time and resources to make sure it works for both players.

PICK WHAT FITS

 

Before you start calling executives at Lowe's (LOW ) or Wal-Mart, make sure you and your company are suited to a partnership. "If you're too busy managing your current business, a partnership will be very difficult," says Ott. Large companies are most interested in partnering with small firms that have a working product but not a lot of sales, or a product that hasn't hit the market yet, in which "there's just enough information for the large companies to see that it works. Big companies love that stage," says Gerdes.

The type of partnership that makes sense for your company depends on your goals. Want to get into a new market quickly? Try a distribution agreement. If you want to jack up revenues but don't need to build brand awareness, a licensing deal could do the trick. Michael Lefenfeld, CEO of $500,000, 10-person SiGNa Chemistry in New York, aimed to expand his two-year-old company's customer base when he made a deal with Sigma-Aldrich (SIAL ), a much larger St. Louis chemicals distributor. Sigma-Aldrich would include in its own offerings small quantities of Lefenfeld's product, a chemical compound that prevents certain metals from catching fire. The immediate revenue boost won't be much, but Lefenfeld hopes Sigma-Aldrich's customers will eventually start buying from him directly. So far, so good. Lefenfeld says a handful of customers have placed large orders. He expects 15% to 20% of 2006 revenues to come from sales related to the partnership.

Once you know what you need from an alliance, make a list of companies with complementary goals. Study each company's Web site, analysts' reports, and media coverage, homing in on potential partners with the core strengths you need. But don't just look at the top one or two in the field. "You could find that the No. 3 player is a lot more flexible to work with," says Lorin Coles, managing director and founder of Alliancesphere, an Atlanta consulting firm.

The easiest way to forge an alliance may be to work with your own customers. That strategy has paid off for Amy James, CEO of SixThings, an Oklahoma City company that analyzes educational materials for publishers to make sure they comply with No Child Left Behind guidelines. "Our partners start out as clients, and it helps us negotiate further relationships with them," says James. In 2004, after a customer asked her to consider a joint distribution deal to sell to school districts, James realized partnerships could boost her 40-employee company's revenues. She has since made six licensing or distribution deals with companies larger than hers. Together they brought in about 25% of the company's 2005 revenues of $1.2 million.

But be aware that targeting your customers can be perilous. While James was researching a client that she was thinking of forming an alliance with, she discovered that several of its customers were behind in their payments. Her client's CEO bristled when she brought it up. Worse, the company had once considered buying James's firm, and at that time she had revealed proprietary information that now gave the larger company the upper hand. After about 10 months, negotiations on an alliance halted, and James says it's a struggle to keep the customer relationship from becoming strained as well.

Once you've found a potential partner, you'll need someone inside to champion your cause. That can be trickier than finding the company in the first place. "It can be six months before you figure out who is most likely to take your flag and run with it," says Gerdes. Most likely, that person will be in new-business development or, if you have a new technology, in research and development. After SiGNa's Lefenfeld targeted Sigma-Aldrich, he researched the company's previous deals by reading press releases and news stories. "The same name kept coming up," says Lefenfeld. In May, 2005, he sent an introductory e-mail to the president of the chemical division, who passed his name to the director of business development. Lefenfeld was soon called in for a meeting.

When making your pitch, be sure to tailor it to the interests of the larger company. Note how your product or service can help your potential partner achieve a particular goal, fill a hole in its product line, or differentiate itself from rivals. And be sure not to sound off too long about your own technology. "I saw thousands of presentations by small companies in which the presenter would talk all about their great new technology without ever discussing how it would help us," says Ott, who supervised strategic alliances for a large company before becoming a consultant.

Bill Moore, CEO of allrecipes.com, has succeeded by tailoring his approach to companies in different industries. Moore's Seattle company gets the bulk of its revenues from advertising on its Web site. In 2001, Moore began entering partnerships through which his company supplies recipes and diet advice to other Web sites for a monthly fee. Moore won the business of Roche Holdings, for example, by providing recipes appropriate for people with illnesses that the company makes a drug to treat. He offers information on nutrition and recipes for healthy meals to supermarket chains such as Safeway (SWY ) and Albertsons (SVU ). Alliances are the fastest growing part of the business, says Moore, and account for 35% to 40% of the company's $8 million in 2005 revenues.

MEASURING UP

 

You may be ready to get your deal in motion, but remember, your potential partner is working on its own timeline. A large company's due diligence on your outfit can take two weeks -- or a year. It may test your product or require the approval of many layers of management. "The biggest challenge is being able to jump through all those hoops for the large company," says Gerdes. Janice Mahon, vice-president for technology commercialization at Universal Display (PANL ), a $10 million Ewing (N.J.) company that sells flat-panel display technology, spent six months working with a potential partner's R&D staff figuring out how the two could combine their technologies. Just when she thought they were ready to make a deal, the larger company told her she had to make her case to managers in both purchasing and manufacturing. It took another six months to get the go-ahead.

The danger here is revealing your company's strategic advantage only to have the potential partner leave you in the lurch. So play your cards close to your chest as long as you can. "To you, it's life and death," says attorney Craig Ritchey, a partner at Dorsey & Whitney in Palo Alto, Calif. "To them, it's a drop in the bucket." Tread carefully with joint development or licensing deals in which the other company wants to use your technology. You might also seek alliances that require less disclosure, such as allowing a partner to manufacture only a few components of your product, limiting its knowledge of how it works.

When drawing up a contract, set a timetable that is long enough to make gearing up for the deal worthwhile, but not so lengthy that the price you settle on may prove too low by the time the contract is up. Three-year contracts are typical. To ensure you get paid, ask for a minimum amount of money up front, advises Suzanne Bell, a partner at Wilson, Sonsini, Goodrich & Rosati in Palo Alto. Nail down what the larger company will do to promote the product, including the size of the company's sales force and its budget. And consider limiting your partner's exclusive rights to your products to a specific use or geographic region. Don't forget to add a clause about how to measure success, and, if need be, how to end the relationship.

For an alliance to deliver the results you hoped for, you can't let it run on autopilot. Depending on the size of your company and the work involved, you or one or two of your employees need to oversee the partnership. That may mean visiting factories, checking numbers, even golfing with key players in the larger company. Further, you can't assume that the larger company will push your product. "If yours is the 100th thing a sales force is selling," says Coles, "they might not care." At allrecipes.com, Moore initially had employees manage alliances informally. But "as the business grew, I saw we had to go from having someone who was a jack-of-all-trades to people who specialized in these areas," he says. Two employees now manage day-to-day operations of the licensing arrangements.

The longer your alliance lasts, the more likely the deal's original champion will move on. Forging relationships with several people in the company may protect you. In the end, your partners may not need you as much as you need them. But that can be our little secret.

For more on how these companies forged successful partnerships, see businessweek.com/go/sb/partnering

By Anne Field

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