Australia: Strategic partnerships – how to avoid coming to grief

An ideal way to grow a business is to enter into strategic partnerships with other businesses with a similar business plan, vision or burning desire to "conquer the world".

Business partnerships can take many forms

There are examples of many successful business partnerships, be they joint ventures, marketing partnerships or strategic alliances.

In many cases, it begins with an approach by one party to another suggesting that the two parties might work well together.

Problems often occur when the approach is made by a large business to a small business and the question for the small business is, how does it protect itself?

It is not such a problem in relation to a marketing partnership, as that usually involves the parties mutually benefitting from, for example, one business providing a database and the other business providing the development tools and perhaps taking a clip of the success, i.e. the increased business.

Strategic partnerships between large and small businesses

Problems often arise when it is a strategic partnership, that is, when the parties decide to go into business together. Successful examples that come to mind are Woolworths and Jamie Oliver and perhaps QANTAS and Neil Perry.

But for all of the successful strategic partnerships, there are probably thousands where there has been great pain and suffering by the smaller participant.

The purpose of this article is to try to highlight some of the pitfalls and provide some direction to help you end up in a successful relationship, rather than a failed relationship with the other business.

Proceed with caution and do your due diligence

The aim of any partnership is for both parties to receive benefit from complementary skills or assets.

It is important at any time, but particularly if you are considering entering into some sort of relationship with another business, that you carefully consider what you have to offer.

I have often found that owners of small businesses, when approached by a larger business, get all excited at the prospect of making lots of dollars, but fail to see the pitfalls.

Importance of a confidentiality agreement

One of my mantras in life is that it "begins at the beginning". It is absolutely essential that the whole process be gone through in a proper way and it starts with perhaps 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 significant amount of money, but it can help the due diligence process proceed in a businesslike way.

Some small business 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 not that you do not trust them, but that you run a good business and, in running a good business, you would expect those that you are going into business with 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.

Make sure the documented agreement includes an exit strategy

Obviously, once the courting period, if I can put it that way, has been completed, it is then a matter of documenting what the parties have agreed.

This can be an "off–the-shelf" type of 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 relationships.

Food manufacturer fails to protect itself against would-be strategic partner

A recent example was a small company that had developed some outstanding recipes for healthy food. The company 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 company going into direct competition with the small company, with which it was still negotiating a strategic alliance.

What does a small business do in these circumstances? Any lawyer knows that to take on such a large business with deep pockets would be an absolute nightmare for the small business 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.

Multinational company blatantly copies registered design of smaller rival

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's 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 knew that the smaller company was growing 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 with all of its large law firms, QCs to the left, QCs to the right, and won, both in the first instance and three-nil in the appeal.

The same fight is now being fought in relation to the damages, that is, interlocutory proceedings, requirement for onerous discovery and all the things that the big end of town is only too good at doing, that is, running up costs, delaying and trying to kill off the little man.

Register your intellectual property and get professional advice

Each of these matters involving relationships between businesses was 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 one who takes a holistic approach to documenting your relationship with the larger business.

Perhaps it is not just legal advice that is required. It may be necessary to do proper business planning, perhaps the registering of designs or copyright or patents and, of course, ensuring that the small business is in every other way well set up to protect its position while being part of a rigorous partnership that hopefully will mean a significant increase in business.

"It begins at the beginning."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.