During a breakout session on “Choosing Business Models” at the IMC GROW! Conference in Las Vegas, it became apparent that several attendees already utilize or are considering strategic alliances and/or licensing deals. I’m more of an optimist than a pessimist, but I did find myself calling up sad stories and providing warnings.
Licensing can be a wonderful idea for a service firm that has solid content. Other professionals who don’t have great content but love to speak, train, consult, or coach pay a reasonable fee for your permission to utilize your content. You can provide training and install some form of quality assurance program to protect the quality and your company’s reputation.
However, the problem is that most people who pay licensing fees to use someone else’s material are not business-minded or entrepreneurial. Before you know it, licensees are calling you to ask for referrals of clients or assistance with selling.
I like reviewing any licensing proposal through the lens of franchising. You may still choose to only license your content, but looking at geographic considerations, assigning a value to your marketing, reviewing the assumptions behind business management so everyone can make some money, thinking through legal protection for everyone involved, clarifying responsibilities, etc. can strengthen a licensing arrangement. I’ve seen people opt for franchising once they look through that stricter lens.
The same thing happens when a strategic alliance is being proposed. What would prevent the participants from fully committing to a more formal joint venture? Those issues are what destroy so many strategic alliances.
When companies approach us at The Service Industry Fund™, our first step in due diligence is about scalability. If it doesn’t seem to us that the key players in the business have what it takes to resolve over-dependence on an individual, detailed analysis of market potential, product viability, or cash flow is a waste of their and our time.
A business Is STILL too dependent on an individual IF:
This list could become much longer… and is very important.
LMN, Inc. has grown over the past few years primarily as a subcontractor to much larger (PRIME) corporations. LMN utilizes a mix of domestic and off shore employees to maintain quality and minimize costs. Recently, large clients have been approaching LMN directly. LMN’s certifications as a small, minority owned-, and woman owned- business may have opened some doors, but it’s clearly their capacity to execute well that is attracting large projects.
Recently, one of the large corporations (PRIME) that has been consistently sending business LMN’s way has expressed an interest in acquiring LMN. The large corporation is particularly interested in how LMN’s offshore staffing is handled.
The Owner/President of LMN was inclined to answer the prime corporation’s questions openly and completely. She wanted to demonstrate appreciation for all of the projects that have been subcontracted to LMN. And she was concerned that if she isn’t forthcoming, the pipeline of projects from that major corporation will stop.
What would you do if you were the Owner/President of LMN?
The answer flows from where the Owner/President of LMN was/is headed before the possibility of being acquired came up.
If the Owner/President is tired, bored, or ready for a new challenge, she might view acquisition as a welcome exit strategy. However, if she has waited too long and is really tired, she may be way too inclined to reveal trade secrets. I know of situations like that where the owner of the subcontracted company said so much that the larger corporation didn’t need to acquire her company. They simply took the information, used it to make improvements to their approach, and left the former subcontractor “hanging in the breeze.”
If you would be inclined to sell in this situation, it pays to utilize advisors so you don’t share too much and inadvertently lower the perceived value of your business.
We helped one of our clients in that circumstance sell her shares to a few company executive(s) so she could get the money she wanted and the executives (new owners) would then negotiate with the larger corporation about possible acquisition (or not).
If LMN’s Owner/President has taken a longer term view, she may be excited about the fact that large accounts are now coming directly to LMN and be glad that LMN is less dependent on any one (or a few) PRIME corporation(s). If so, she would see that just because the larger corporation has expressed an interest in acquiring her company, she should still protect its trade secrets.
(Note: In some ways, having a high percentage of your business coming from one major corporation feels like a bad acquisition has already happened. The large corporation may not have paid you, but they do essentially own you.)
This is a peer-to-peer situation that calls for equal levels of disclosure, due diligence, and exploration of the pros/cons to closer affiliation. It is not the time to think of terms of “courting the major corporation.” The large corporation should be courting LMN. What is the benefit of affiliating? What is so wonderful about becoming part of the major corporation that beats owning your own business?
Why is the larger corporation interested in acquiring LMN? Or are they really interested in eliminating competition (since large clients are now going directly to LMN)?
We advised LMN’s Owner/President to explore the possibility of a joint venture and table the acquisition discussion for now. Joint ventures involve clear commitments, declared time frames, shared responsibility, etc. If the two entities can find a fair approach to work closely together to both benefit…why would an acquisition be necessary?
A few of our clients have had DRAMA as part of their corporate cultures. You know the type. When a team member makes a suggestion, it is immediately perceived as an attack on someone else. When employees come into the office in the morning, they immediately tell one another stories about what went wrong on the home front. When a customer complains, the blame game starts plus the problem is blown way out of proportion. And no…they are not both family owned/operated businesses.
The leaders came to us as growth strategists to identify opportunities to speed up their growth. The opportunities were fairly easy to identify from the market (external) perspective. Competitors in both instances were leaving “money on the table” so there is “low hanging fruit” to be claimed. Large corporations have been taking their customer bases for granted, so there is tremendous opportunity for a customer-centric, quality-oriented competitor.
You guessed it, we are focusing on changing their corporate cultures.
IF the leadership teams each truly want their enterprises to accelerate growth, they both must address internal behaviors that interfere with innovation (instead of suggestions being stifled), quick response (instead of losing time to blaming one another), reassurance and trust (instead of exaggeration and a focus on the negative), welcoming optimism (rather than complaints and negativity).
Often corporate culture can be utilized as a leverage point for growth. When a company wins “BEST PLACES TO WORK” awards and has a reputation for investing in its employees, organic growth usually results.
A corporate culture of innovation or excellence can guide mergers and acquisitions. No matter what technology, production capacity or distribution channel drove the companies to combine, alignment of corporate cultures is needed to optimize the return on investment with mergers and acquisitions.
At IMC’s annual GROW! Conference in Las Vegas earlier this week, Dr. Charlotte Roberts provided an excellent presentation about MENTAL MODELS. (Roberts coauthored THE DANCE OF CHANGE and THE FIFTH DISCIPLINE FIELDBOOK.) One of her reminders was that corporate culture is the combination of the prominent mental models. Beliefs and premises are at the heart of mental models and corporate culture.
The lingering post-recession uncertainty, frustrations with Government, global terrorism, etc. have eroded the optimism of so many people in this world. It may be time for you to audit the beliefs, premises, mental models within your organization. When people are jumpy, convinced they might get fired, or waiting for the executives to make decisions, accelerated growth can’t be the first thing you tackle.