5 Rules for a Successful Small Business Partnerships - Black Enterprise

5 Rules for a Successful Small Business Partnerships

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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.