April 23rd, 2023
April 23rd, 2023
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5 - 2 votes
In the often cutthroat and highly competitive world of business, small businesses frequently find themselves at a disadvantage due to their small size. One way small businesses can increase their capacity and gain an advantage over their competition is by combining forces with another business. There are many different ways businesses can combine their efforts and work together, each configuration with its own benefits and challenges. This guide will explore the many ways businesses can come together, from the least formal to the most formal, in an advantageous way that best meets the needs and goals of all the parties involved.
The most informal kind of business collaboration is the strategic alliance. A strategic alliance, created using a Strategic Alliance Agreement, is a legal agreement between two companies to share access to their technology, trademarks, or other assets. Unlike a merger or joint venture, this business collaboration does not create a new company. This agreement is less complex and less binding, but also involves less liability, than a joint venture, in which two businesses pool resources to create an entirely new separate business identity.
Companies may enter into a strategic alliance to expand into a new market, improve their product line, or develop an edge over their competitors. This arrangement allows two businesses to work towards a common goal that will benefit both. The relationship may be short- or long-term and the agreement is usually simple and informal. Often, businesses seek out strategic alliances in the areas of design, product development, manufacturing, distribution, or the sale of goods and services, but any business objective can be furthered by entering into a strategic alliance.
Example: The coffee company Starbucks and the book store Barnes & Noble created a strategic alliance without creating a new company in 1993. Having both coffee and books available in the same space lead to an overall improved customer experience and an increase in profits for both businesses. Both companies were able to use their strengths while sharing the costs of renting space to the benefit of both companies, setting them both apart from other book stores and coffee shops.
There are two main types of strategic alliance: the non-equity strategic alliance and the equity strategic alliance. In the more commonly used non-equity strategic alliance, businesses are able to use each other resources and strengths to further their shared goals while remaining totally independent businesses. The two companies may earn profits together which they then share. But more often, the two businesses use each other's infrastructure and resources to increase their own earnings without generating a shared profit. This is the loosest form of strategic alliance.
In the less common equity strategic alliance, formed using a Collaboration Agreement, two companies buy interest, or equity, in each other's business. They essentially are investing in each other's business in this way by purchasing this interest. By doing this, the businesses are able to benefit from each other's success by owning a part of each other rather than just splitting shared profits. This is a more structured form of strategic alliance and often lasts for longer than a non-equity strategic alliance.
Strategic alliances are one of the most flexible forms of business collaboration since the companies do not need to merge capital and can remain independent of each other. Cooperating with a good strategic partner can be a powerful, but accessible, way for small business owners to grow their businesses. Strategic alliances can generate more leads, more customers, and more profits, while also cutting costs. A well-considered strategic alliance can lead to knowledge sharing, expanding the customer pool, and gaining low-cost access to complementary resources.
However, a strategic alliance involves its own risks and challenges. While the agreement is usually clear for both companies, there may be differences in the companies' respective cultures or how they conduct business. Differences can lead to misunderstanding and conflict. Further, if the alliance requires the parties to share proprietary information, they must trust each other to use this information ethically and responsibly.
A joint venture, created using a Joint Venture Agreement, involves two companies investing their funds to create a third, jointly owned company as a new subsidiary of both of the original companies. The parent companies then typically agree to split any profits the joint venture brings in. By creating a joint venture, the new company has access to the assets, knowledge, funds, and infrastructure from both of the parent companies. This allows the new company to have a head-start in a competitive market as it doesn't have to begin from the ground up. However, since the parent companies remain separate, they are able to continue conducting their original business as they had been before without their structure or dealings being altered by their combination of forces. This is often considered the best of both worlds for many small businesses that want to venture into new markets with the assistance of another business while maintaining the company that they've already created.
Example: In 2008, the joint venture of NBC Universal Television Group and the Disney ABC Television Group had the objective of joining forces to create an online video streaming platform. The two companies came together to create the subsidiary company, HULU. This new company began providing quality streaming content to consumers and became one of the leaders of streaming entertainment in the market.
A joint venture, though similar in some ways, is not the same as a partnership, created using a Partnership Agreement. The main difference between a partnership and a joint venture is that a joint venture is limited to one particular project while a partnership is longer lasting and generally pursues a number of different projects. Joint ventures are usually only formed for a specific amount of time while a partnership is built for the long term.
Those who enter into a joint venture need a contract that spells out the parameters of their involvement. This agreement describes the purpose of the arrangement and sets up everything both parties need to start their shared venture. This includes profit and loss details, ownership allocations, and a termination clause. Other parts of the agreement can include how the venture is staffed and structured, the scope of the venture, and what determines the success of the venture. Finally, the agreement specifies how the parent companies will split profits and losses and how they will pay any taxes that are due.
There are many benefits to this type of business relationship, with the main advantage being that each of the parent businesses is able to use their shared resources to acquire additional market share without having to fund the full amount to accomplish the project alone. This sharing of resources facilitates companies' expansion into new markets, allowing for lower-risk business growth. Joint ventures are also incredibly flexible. The parent companies are bound to each other only via their new company and each business is able to retain its own unique identity and autonomy. Each may carry on business activities unrelated to the joint venture.
Though there are many benefits, there are also some challenges and disadvantages associated with joint ventures. Engaging in a joint venture may limit a company's opportunity to interact with other organizations, especially if the joint venture agreement contains non-competition or non-disclosure clauses. This can end up stifling the parent companies. Participants in joint ventures may also face increased liability. While most businesses entering joint venture agreements are small businesses with a limited liability structure, each participant is equally responsible for legal claims arising from the joint venture.
A business merger, created using a Business Merger Agreement, is one of the most formal and permanent ways for two companies to collaborate with each other. A merger is a legal agreement between two companies to combine and become one single company. The agreement between the companies differs on a case by case basis, but the ultimate goal of every merger is to create a new entity that is stronger than the two individual parts were on their own.
Companies choose to merge for a variety of reasons. Mergers can expand a company's customer base, increase their market value, or fill gaps in their production capabilities. In a merger, the shareholders of the individual companies become shareholders in the newly merged company, and, ideally, the value of their shares increases during and after the merger. Companies often merge to become more competitive. For example, the second and third highest-grossing brands of bottled water might decide to merge into one company to successfully compete with the brand in first place.
Example: The company Anheuser-Busch InBev is the result of multiple mergers in the beer market. The newly named company is the result of a merger between three large international beverage companies: Interbrew, Ambev, and Anheuser-Busch. Ambev merged with Interbrew, which united the third and fifth largest beer brewers in the world. This resulting company then merged with Anheuser-Busch, a merger of the first and second-largest brewers in the world. This merger created an unbeatable force in the beverage market and extended the international reach of all of the combined company's brands.
Mergers and acquisitions involve similar concepts and considerations but have several important differences. An acquisition, accomplished by using a Business Sale Agreement, involves one company buying the entirety of another company and assimilating its assets. The acquired company becomes part of the acquiring company and loses its identity entirely. The acquiring company typically buys out the other company's outstanding stock to complete the transaction. By contrast, with a merger, two businesses join together and cease to exist as individual entities in the process. Instead of retaining their unique identities, they create a new name and brand that includes elements of both of the original companies. Mergers are designed to be mutually beneficial and increase the overall value of the companies by becoming one. Most mergers involve companies that are of a relatively similar size and have similar values and customer bases.
The two main types of mergers are horizontal mergers and vertical mergers. With a horizontal merger, two companies that operate in the same industry and market space merge to become one. Frequently, a horizontal merger involves two competitors who choose to join forces to beat their other competition. In an industry with fewer brands, companies that provide the same products or services might find it mutually profitable to merge. Creating a new company with a larger target market and more resources can significantly increase shareholder value in this instance. An example of a horizontal merger would be two car manufacturers who merge to outsell their competitors. A horizontal merger would involve rebranding, a revision of company policies, and a redesign of the facilities.
In a vertical merger, companies that operate at different stages of a production chain combine to increase their efficiency. These companies likely produce different parts or services that contribute to one finished product. A vertical merger is most profitable when both companies create one company that shares their equipment, staff, and facilities for increased productivity and efficiency. A vertical merger can reduce production costs, streamline product development, and decrease waste. An example of a vertical merger would be an email provider that merges with a media conglomerate. This deal would centralize communication, consolidate marketing efforts, and create a more cohesive and comprehensive brand.
It often makes sense for two companies to merge to avoid duplication. For example, if two bus companies are competing over the same stretch of roads, they could both best be served by joining their efforts and becoming one company that serves that market rather than duplicating their services. Consumers then benefit from a single business with lower costs. Mergers are also advantageous for companies that may have a good product or process, but have been poorly managed or economically depressed and are in danger of going out of business. By merging with a larger and more stable company, the weaker company is able to survive in its reconfigured form and can save its employees' jobs and its shareholders' investments.
There can also be significant downsides to business mergers, primarily for consumers. A merger can reduce competition and give the new company monopoly power. With less competition and greater market share, the new company is then able to increase the prices for consumers while decreasing the choices available to them. A merger, depending on how it is structured, can also lead to job losses. This is of particular concern for weaker companies merging with stronger companies. Finally, a new merger that results in a larger company may lack the same degree of control and struggle to motivate its workers. Further, if the two original companies had little in common, then it may be difficult for them to achieve synergy with the newly merged company.
There are many ways that businesses can work together to achieve their shared goals. However, businesses should closely study the options available to them and pick the type of collaboration that would best serve their interests.
About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.