Who said that Goldilocks and the Three Bears was only for children? When it comes to going after large contracts, small businesses need to work together to achieve a size that, as Goldilocks would say, is "just right". Larger contracts to a small business can appear to be overwhelming. Goldilocks has given us the answer in that we must find a size that fits the opportunity. This "just right" size can be achieved by a Joint Venture (JV) or Merger & Acquisition (M&A). These methods are common among larger businesses; however, small businesses must find the courage in order to move beyond the "sustainment level" to a "thriving level". Which level do you want? Each method to achieve that "just right" size has its challenges, however, whether you choose a JV, Merger or Acquisition, the upside of success is exhilarating.
I believe the most effective method in creating a business alliance is a Joint Venture (JV). A JV is when two or more companies come together to create a third standalone company. The partnering companies maintain their individual corporate autonomy while owning a share of the new JV. The JV inherits the capabilities, qualifications, and past performances of the partnering companies. For small businesses who want to delve into the water and go beyond just a loose teaming arrangement, a JVs is "just right". A JV allows for businesses to come together and go after a large contract with the capacity of all partners. For example, a dairy farmer can team with a bottler and a trucking company to offer end to end supply chain services for Milk services to grocery stores. Together, these three companies offer a total solution.
JVs have many advantages, but I would offer two critical pieces of advice. First, the JV should create operating guidelines that documents how the JV will function. This document creates the guideposts for operations, finances, and management. Secondly, all egos must be "checked" at the door. When the new JV is formed, a new entity is created and if you want it to be "just right", egos cannot play a part. Regardless of my new title in the JV, my focus is the success of the JV. I always say, I want to be a "king-maker" and not always the King. JVs may not be the right option for some. Although they are great, each owner also must still focus on their primary business. If you really want to dive in to the deep-end and find the "just right" solution you may want to try a merger or an acquisition.
The differences between a Merger and an Acquisition is that in a Merger, two companies are truly combining and joining forces, while with an acquisition, one company is purchasing another. In an acquisition, the company that is being purchased ceases to exist. Its assets, people, and capabilities become that of the purchasing company. Small businesses often believe that they do not have the capacity for an acquisition, however, venturing funding and seller financing have provided the means for the transaction. The beauty of an acquisition is that the acquiring company continues to function as an entity; however, its capacity to perform on much larger contracts is greatly increased.
With a Merger, two companies are combing the same assets, people, and capabilities and the management of the two companies are also often retained. In contrast, with an acquisition, the owner of the acquired company continues to serve in the new entity.
Both methods can provide a "just right" size for small businesses to come together, but these methods also have two key areas that must be addressed. One, people underestimate and do not plan for cultural issues that will arise. Here you have two small businesses with two cultures coming together to create a new one. Careful planning and attention must be paid to this factor or it can spoil the "porridge". Two, often the capacity of the new entity is overestimated. The new entity is better, but just as any new venture it may take time to optimize the results.
Well, you may ask, why aren't more small businesses moving in this direction? Great questions. Two answers: Fear or complacency. Becoming a successful business owner of any size is a monumental achievement. When one finally arrives, the journey may seem too hard to start a new trip. I contend that the same courage it took to get you to be an entrepreneur is the same courage it will take for you to go to the next level via a JV or an M&A. This courage is in each of you reading this article. If you don't win, it is part of the game. So pray, get up, move forward, remember the mistakes and start again. It is what we do!
This article is part of ICIC's Icons of Industry Growth series, highlighting the fastest-growing businesses located in America's inner cities. Small business owners are invited to join these successful entrepreneurs in Boston on October 15-16th at the Inner City 100 Symposium, a premier management education and networking event featuring leading CEOs and Harvard Business School faculty. Learn more here.
ICIC is the national outreach and selection partner for the Goldman Sachs 10,000 Small Businesses program. Goldman Sachs is a partner of the What Is Working: Small Businesses section.