Samuel Poss

When planned and executed correctly, strategic partnerships can be invaluable. They are increasingly used to propel businesses to new horizons of profit-making and expansion.

But they can also be fraught with danger.

Before you enter into a strategic alliance, it's crucial to understand the risks, benefits and legal ramifications.

A strategic alliance is a relationship among two or more parties, which they see as vital to their business goals and is governed by nonstandard documentation because of the complexity or novelty of the relationship.

What most alliances have in common is the ability to allow businesses to create synergies and move quickly through an effective blending of skills, financing, technology, infrastructure, product lines, market penetration or other assets.

As the daily developments in e-commerce demonstrate, flexibility and the power to move at Internet speed are more important than ever.

In one basic form of alliance, two manufacturers may have complementary products. But if one has a larger distribution capacity, they may join forces in a manufacturing and distribution venture.

Or a software company with innovative business software may enlist the funding or infrastructure resources of a large potential user in return for an initial exclusive license or a royalty on the licensing of prototypes.

Indeed, the possibilities of strategic alliances are limited only by market forces and the creativity of the people who conceive them. But it's important to remember that a strategic alliance is not an off-the-shelf product. It takes creativity, planning and analysis to shape and negotiate the relationship.

It's important to fully examine any such deals before moving ahead. When considering a strategic alliance, ask yourself these questions: What is your strategic goal in forming the venture? Does it fit with your business plan? Most importantly, is your potential partner right for you?

Do not forget that the alliance can also fail because your company is not right for the alliance. A strategic checklist of goals, risks and other fundamental issues is a valuable tool throughout the planning, negotiating and operating phases.

When considering a strategic alliance, you should first develop and prioritize your list of partner candidates. Study their track records and foreseeable business needs. Evaluate how the size and strength of your partner, relative to your business, might impact the relationship.

Consider the stage of development of the partner and whether it may become a target for an acquisition or seek a merger in the near future.

It's also a good idea to consider the members of your new potential partnership. For example, are senior people behind the alliance? Go beyond their track record. Ask others in their field what it's like doing business with them.

Once you've settled on a partner, it's time to negotiate the alliance. This is an important stage of the process. Here, for example, you may establish the chains of authority and determine which issues are confidential.

Aim for a collaborative atmosphere, building a consensus as you discuss and assess ways to achieve each other's goals. You don't want to be so aggressive that you win the negotiations but lose the alliance.

Negotiating a strategic alliance generally should be less like a game of high-stakes poker and more a collaborative relationship. If both sides don't win, it's a good bet that they'll both lose, particularly the weaker party.

If your potential partners are playing their cards very close to the vest, this alliance may not be the way to go. If appropriate, test the relationship with a trial period alliance or by implementing the partnership in stages.

Once you are ready to document the alliance, lawyers with broad business experience and creative negotiating skills can be valuable assets on the strategic alliance team.

A letter of intent is generally a useful tool for determining if the parties can agree on the main elements of the deal without the cost and time commitment of preparing definitive documents.

Such a letter allows the parties to test their compatibility during the negotiation process while identifying issues and determining if there is a meeting of the minds.

For a good match, it can bring the deal into clearer focus. For a bad match, it may provide a chance to quit before you're too far behind.

The structure of the alliance is essential in realizing the goals of both parties. It should encourage performance and discourage non-performance.

Careful attention to the particulars of the alliance will yield real benefits in crafting a sound structure. Of course, it's best to be prepared before problems arise.

Be sure to incorporate structured meetings into the documentation along with the flexibility to deal constructively with unexpected problems that will inevitably arise.

Each party needs its own structures to manage the relationship internally and externally. The strategic checklist can help in evaluating the alliance and keeping it on the right track.

Give considerable attention to control issues, although when you enter into an alliance you will give up some measure of control. It is also important to limit potential competition between the parties.

The risk of an ally becoming a competitor is a serious problem that may not be satisfactorily resolved through contractual provisions, no matter how tightly drawn.

The moral is, choose your allies carefully. Nothing is more important to the success of the venture.

Finally, the parties should build in mutual disengagement provisions. Designing the exit strategy for the alliance at the outset is no easy task but may ease the strain of the inevitable separation and hopefully minimize the pain.

Sam Poss is a partner with Century City based-law firm Rutter, Hobbs & Davidoff Inc. He can be reached at sp@rhdlaw.com.

Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

For reprint and licensing requests for this article, CLICK HERE.