By Cathy Mputhia
Today businesses are appreciating the need for forming strategic alliances for a number of reasons. In a highly competitive market, it makes more sense for businesses to unite in a mutually benefiting synergy. Most of the times where one business is deficient in one resource, another business is endowed with that same resource. It could be that your business has the clientele base but lacks technological knowhow or that you have the technological capacity but no adequate clientele base.
Supposing you own a parcel of land in a prime area and would wish to put up residential house but do not have the capital to do this.
Forming an alliance with an established developer would solve your problem.
The developer would inject equity capital while your contribution towards the venture would be in the form of land.
Rather than spend a lot of time and capital re-inventing the wheel, it is faster and cheaper to form a strategic alliance with another firm.
A strategic alliance is a formal relationship between two or more firms formed with the objective of pursuing a set of agreed goals while maintaining independence.
Strategic alliances are difficult to define legally as there are many types.
An alliance can be formed by a series of contracts whereby no separate entity is formed or it can involve the establishment of a new entity as in the case of a joint venture company.
Once it is decided that a strategic alliance should be formed, the first thing one should do is look for potential partners.
Start by determining what you need for the project but you do not have and then determine who has what you need.
Once you identify your partner, it is important to ensure that you also have something to bring to the table so as to avoid loss of control.
It is better to have many potential partners to ensure your bargaining power is not lost.
Letters of introduction are sent out to each potential partner highlighting the venture and stating clearly what is required from each partner.
Once you settle on one partner then the legal documentation is done.
Some of the documents that should be drawn up include non disclosure agreements and confidentiality agreements in which neither party is authorised to disclose details of the alliance without permission of the other.
These agreements safeguard the privacy of the venture as negotiations proceed.
Where the alliance is informal and exists for the exchange of ideas and for networking, then a memorandum of understanding is signed by all the partners.
The Memorandum would include the vision, mission and goals of the alliance.
The partners should consider the legal structure to be used.
Intellectual property
The alliance could be formed by a network of contracts or could be established by incorporating joint venture companies.
If a joint venture company is formed then other issues such as shareholding must be considered before incorporation.
With most strategic alliances, independence of the partners is maintained as the bond between the members is temporary.
When drawing up any documentation for a strategic alliance it is important to consider intellectual property issues.
For example, the stronger partner may license the weaker one to use its trademark.
This is common in distributorship alliances where the manufacturer authorises the distributor to use its trademarks for the term of the alliance.
Where the nature of the alliance is supply and manufacturing, the necessary supply agreements have to be executed.
Other issues to consider would be the ratio of contribution of capital and profit sharing ratios, financing issues, restriction of competition and reporting obligations.
The term of the alliance should be clearly stated to avoid ambiguity.
A termination clause should also be included as alliances are usually temporary arrangements.
Obligations of each partner must be clearly set out and events of default also included.
The penalties for any defaults should be highlighted to avoid ambiguity.
One of the most important clauses in an alliance agreement is the control mechanism for the alliance.
Depending on resource endowment, one partner can have more control of the alliance than the others.
Dispute resolution is also another important clause to consider with arbitration being more favourable.
Where the alliance is a foreign entity, then differences in culture must be considered for the alliance to be successful.
Alliances are advantageous in that, each partner is independent of the other and continues with its other affairs independently.
Alliances are usually formed where there is one project or a series of projects to be undertaken.
However, there is some element of loss of control in aspects like sharing profits and decision making.
There is also loss of privacy as all the necessary information must be shared.
With networking alliances, where technological knowhow is shared, the mentor loses as it exposes his/her technological know how to the protégé.
A firm has to balance the benefits to be derived from an alliance vis a vis the disadvantages.//Business Daily
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