5 Rules for a Successful Small Business Partnerships

Partnerships make sense when they increase your competitive advantage. Here's what else you need to consider

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Walter Grady, CEO of Seaway Bank and Trust Co. (No. 8 on the 2010 BE BANKS list with assets of $385 million ), is expanding his bank beyond its Chicago footprint. Seaway entered the Milwaukee market for the first time after its takeover of Legacy Bank (No. 13 on the 2010 BE BANKS list with assets of $231 million). The transition was completed on March 12, a day after Wisconsin bank regulators closed Legacy. The closure ended a 12-year run for Legacy after it was founded by Delores Sims, Margaret Henningsen and Shirley Lanier. The three African American women raised $5 million in capital to start the bank in 1999 and focused on providing financial services to the under served in Milwaukee. Their approach worked as Legacy became one of the nation’s fastest-growing black banks in the last decade, earning the distinction of becoming the BE Financial Services Company of the Year in 2009. “The founders of Legacy were phenomenal women and they had a vision and mission that we hope to blend with Seaway in Milwaukee,” Grady says. The recent recession and hefty loan losses, however, hurt Legacy's financial standing. Last November, federal regulators ordered the bank to boost capital to sufficient levels or sell to another institution in 60 days. On March 11, the Wisconsin Department of Financial Institutions closed Legacy and appointed the Federal Deposit Insurance Corp. as receiver. FDIC spokesman David Barr says Seaway bought nearly $166 million of the bank’s assets and the FDIC assumed the remaining $24 million. Efforts by BE to reach Chairwoman and CEO Sims and the other founders for comments on Legacy's closure and Seaway's takeover proved unsuccessful. Seaway, Chicago’s largest black-owned bank, absorbed all of Legacy’s more than $183 million in deposits and its one branch in downtown Milwaukee, adding roughly 4,400 individual and business accounts. Grady says the deal will boost Seaway’s assets to about $630 million and give it $500 million plus in deposits which would place it among the nation's five leading black banks. Seaway operates 10 branches mainly in the Chicago metropolitan area and has ATMs at O’Hara and Midway airports. He says Seaway plans to launch a corporate trust department and a 1 percent down home mortgage program, products geared to businesses and low to moderate income individuals in Milwaukee. The institution currently has no plans to add more branches in Milwaukee but may consider an expansion if demand was there. The FDIC’s Barr said Legacy’s closure was due to significant losses in its commercial real estate and industrial commercial lending portfolios over the past 18 months. "Legacy Bank unfortunately was one of the almost 350 banks [nationally] that fell since the financial crisis begin in 2008," Barr said. Legacy’s shutdown continues a diminishing trend for black-owned banks. There were 28 US banks owned by African Americans as of Sept. 30, 2010, down from 33 for the same period in 2009, according to Federal Reserve Bank data. William Michael Cunningham, social investment adviser at Creative Investment Research Inc., a Washington D.C. firm specializing in minority banking, maintains that the 2010 number is actually closer to 25 because three black-owned banks have closed since September. Legacy becomes the fifth black-owned bank forced to close in the past year. Cunningham says the other banks include American State Bank in Tulsa, Oklahoma; Imperial Savings and Loan Association in Martinsville, Virginia; Ideal Federal Savings Bank in Baltimore; and Dwelling House in Pittsburgh Cunningham further says the loss of those banks means black consumers and churches in those communities will find a harder time gaining access to financial services, including obtaining small business loans and mortgages as well as opening checking accounts. "That’s more critical now because of the poor economy and weak state of the banking industry in general," Cunningham says, citing that existing institutions need to review strategic plans and raise capital before being required to do so by regulators. Although he called Legacy’s closure a "tragedy," Cunningham says the good news is the institution is being seized by another black-owned bank: "A black bank is needed there because the credit needs of that community has a history of not being met by mainstream banks."

There's strength in numbers, but pain in bad partnerships. (Image: Thinkstock)

The old adage that there’s strength in numbers also applies to business. Two smaller entities forming a partnership or joint venture can combine resources and go after business that would be accessible separately. But before joining forces, you must determine if a partnership makes sense, and then identify the right partner.

Leonard Greenhalgh, professor of management at the Tuck School of Business at Dartmouth and author of Minority Business Success: Refocusing on the American Dream (Stanford Business Books; $19.95), suggests entrepreneurs keep the following in mind before striking up a partnership or strategic alliance:

First ask how it benefits your company. According to Greenhalgh, the test for this is whether the collaboration presents a stronger value proposition — whether the companies offer customers something better working together than they can offer as a solo act. “Perhaps the advantage is lower cost — by eliminating some duplication — or being able to offer subassemblies ready to install, integrated services, broader geographic reach, or something else,” he says. “But there needs to be a real increase in value.”

Define the strategic need first. Then investigate what other business will help meet that strategic need (i.e., some factor that will increase competitive advantage by strengthening the value proposition). Then it’s important to learn whether the relationship will work. “That’s a bit like dating. You may be instantly attracted, but you need to figure out whether the person is someone on whom you really want to become dependent,” says Greenhalgh. “Then the terms of the partnership need to be negotiated.”

Partnering doesn’t make good business sense if you simply like the other person. A business owner has to manage the business; a partnered business owner has to manage the business and the relationship, too. There has to be a strategic advantage to justify the extra time and effort partnering requires. “The entrepreneur can never afford to forget that this is business. It doesn’t matter whether you like the one you’re partnered with; it matters whether the business is stronger, more profitable, or more stable in an uncertain business environment.”

Realize when it’s time to back out. Dissolving a partnership is a business decision. If the costs of coordination exceed the benefits, then a breakup is the right thing to do. “I hate to use this analogy, but it’s appropriate: when a couple needs to get divorced, they’re usually both better off being apart.”

Make sure you get legal advice. Lawyers are an asset because they bring up issues of which the entrepreneur may be unaware, says Greenhalgh, pointing out that they should advise the entrepreneur, but not be allowed to take over the negotiations. “An attorney is supposed to look out for the best interests of the client, not the best interests of the partnership, so they need to be managed carefully,” he suggests. “My advice is to get a really good lawyer, one who specializes in business, not an aggressive litigator. Those people are out there: the entrepreneur needs to get good recommendations.”

Want to know more about building smart partnerships? Then attend Black Enterprise’s annual Entrepreneurs Conference, taking place May 22-25, 2011 in Atlanta Georgia. Visit blackenterprise.com/ec for more details. As an incentive BE is offering you a discount on early registration: Enter code BEDG295 and receive $200 off.