An ideal way to expand a business is to enter into a strategic partnership with another business that has a similar business plan or vision. However, SMEs can’t enter into a partnership blindly and need to be aware of how they can protect themselves from bad big businesses.
For every successful strategic partnership, there are probably many more where there have been great pain and suffering experienced by the smaller participant.
I have often found that when owners of small businesses are approached by larger businesses, they get swept up by the prospect of making lots of dollars, but fail to see the pitfalls.
It is absolutely essential that the whole process is approached in a proper way, beginning with some initial documentation, for example, a confidentiality agreement if there is to be mutual disclosure of sensitive information. Such a document does not necessarily cost a great deal of money, but it can help due diligence process proceed in a professional way.
Some SME people are apprehensive about asking for such documents, envisaging that they might be met with the response, “Don’t you trust us?”
The answer is it's not that you do not trust them, but that you run a good business and you expect the other party also to run a good business, which means that both of you would want to keep proper records and protect each other along the way. In other words, you are being businesslike rather than distrustful.
Once the “courting period” has been completed, it is then a matter of documenting what the parties have agreed upon. This can be an “off-the-shelf” agreement, but it is preferable to develop an agreement primarily for the deal on foot, with both parties having an input.
A well drafted document will offer both parties comprehensive direction as to how the relationship is to work and will provide a proper exit strategy if the relationship does not work out as the parties anticipate. Having a proper exit strategy is absolutely essential in these types of agreements.
A recent example was a small business that had developed some outstanding recipes for healthy food and was approached by a major national food production company.
The excitement in the small business was palpable and certain confidential information involving recipes for some of the more successful products was handed over in the early stages “for production testing”.
These recipes were promptly copied and new food lines were released by the big business, going into direct competition with the small business, with which it was still negotiating a strategic alliance.
What does a SME do in these circumstances? Any lawyer knows that to take on a large business with deep pockets would be an absolute nightmare for the SME owner, apart from the cost. The risks of losing and having a costs order made against the business owner, who probably has his own personal assets on the line, make the whole thing unworkable and unlikely to be litigated.
Another recent case involved a major international company which was a supplier to a small business, but the small business was growing exponentially because it had a particularly smart product that the owner had designed.
The owner had registered his design under the Designs Act, but that meant little to the major multinational. It blatantly copied the design and went to market with it. At the same time, it attacked the smaller business’ customer base, offering a much cheaper product, subsidies for transport and a whole range of things calculated to destroy the smaller company’s business.
The big multinational sold raw material to the smaller company and consequently the smaller company grew exponentially. For that reason, the multinational decided it would compete and, in fact, put the smaller company out of business.
Fortunately, the smaller company took on the big end of town and won, both in the first instance and three nil in the appeal.
Do your due diligence properly
Each of these matters involving relationships between businesses is potentially very advantageous. However, if not developed in a proper way, such relationships can be very costly. It is not just the financial costs, but also the emotional cost and the non-productive time lost in litigation which might last for several years.
If you are a business owner exploring the possibility of a strategic partnership with a larger business, it is vital that you receive legal advice not from a purely transactional lawyer, but from someone who takes a holistic approach in documenting your relationship with the larger business.
It may be that it is not just legal advice that is required. It may be necessary to do proper business planning, perhaps registering designs, copyright or patents, and ensuring that the small business is well set up in every other way to protect its position, while being part of a rigorous partnership that will hopefully lead to a significant increase in business.
Geoff Roberson is an accredited specialist in commercial litigation at Stacks Champion.