Partnering with giants

Written by Camilla Cornell

Dan Villeneuve’s spring water bottling company was flush with orders in the fall of 2002 and eager to kickstart a new production line, when he received a call that turned the tide on growth. His German supplier of an essential piece of production equipment had stopped shipment for fear of nonpayment, and was refusing to deliver before receiving a guarantee. It’s not that Villeneuve’s fledgling firm, Iroquois Water Ltd., was in financial trouble — in fact, the company was on track to do almost $4 million in sales that year and was growing fast. Rather, the supplier had just learned that because Iroquois resides on Native land, on an island near Cornwall, Ont., repossession in the event of default would be impossible. Villeneuve, Iroquois’ president and CEO, could find no way to reassure his erstwhile supplier. As a result, his new multimillion-dollar production line was no more useful than a ship in dry dock.

That’s when Villeneuve decided to look for a partner: not just any mate, but one with enough size and cachet to carry Iroquois over major financing hurdles and all the other obstacles on the road from startup to sustainability. He set his sights on Toronto-based Cott Corp., the world’s largest producer of private-label soft drinks. His reasons were threefold: Cott was a successful company with annual sales of $1.2 billion and a huge client base; Villeneuve already had contacts there; and, finally, the entrepreneur believed Cott could benefit from the relationship as much as Iroquois could. “There had been a global decline in soft-drink sales,” he explains. “But bottled water sales were headed in the opposite direction.”

But to fully enjoy the perks of a partnership, Villeneuve knew he would have to tread carefully around the giant. Strategic alliances with companies much bigger than your own are fraught with danger. Among the risks: becoming overdependent on your partner’s business capacities, getting lost in the shuffle of a corporation’s myriad interests or simply being bossed around. “They’ll roll over,” says Vancouver-based partnering expert Larry Colero, “and you’ll get squashed.”

That said, participating in a carefully managed minnow / whale alliance can reduce your business risks and provide access to the resources, purchasing power and — best of all — the customers of your partner. So how can you ensure that your company thrives in the shadow of a behemoth? Here are eight essential teachings of Villeneuve and other entrepreneurs who’ve done it right.

Command respect

With the help of his contact at Cott, Villeneuve quickly landed a 15-minute meeting with Cott’s executive vice-president, Mark Benadiba. But when Villeneuve was ushered into the room, Benadiba introduced himself and then suggested he had to attend to pressing business elsewhere. “You’re in capable hands,” said Benadiba as he gestured to the other executives in the room. “Nice meeting you.”

That’s when the mouse roared. “With all due respect,” said Villeneuve, “I just drove five hours to be able to spend 15 minutes with you. I know you’ve heard every pitch in the world, but if you have the patience for 15 minutes, I think I can make up your mind with regards to the spring water bottling business.” Taken aback and perhaps mildly amused, Benadiba stayed to hear Villeneuve’s presentation. “I think you have to establish from the first that you’re operating as equals,” says Villeneuve.

Sell yourself

Pitch not what your partner can do for you, but what you can do for your partner. Villeneuve knew that Cott was playing catch-up in the bottled-water business with other soft-drink makers, such as PepsiCo. and Coca-Cola. An alliance with Iroquois, Villeneuve argued, would help Cott make up significant ground. He talked up Iroquois’ state-of-the-art equipment, its dedicated staff and its location on the U.S. border, within a six-and-a-half-hour drive of 172 million consumers — all of which appealed to the plus-sized potential partner.

But don’t sell yourself out

According to Colero, founding partner of Crossroads Programs Inc., which helps companies navigate the perils of partnerships, entrepreneurial companies must have a strong sense of identity and a well-conceived strategic plan if they are going to enter a David-and-Goliath relationship. They should consider not only how the partnership can contribute to their growth, but also how it might slow them down. Also critical, says Colero: “You have to be willing to walk away if it’s not going to work for you.”

Mohan Thadani understood exactly what would make or break a deal between Gram Precision Inc., his Mississauga, Ont.-based distributor of electronic scales, and his target partner, Bonzo Electronics Inc. of Hong Kong. Through 2002, says Thadani, “Gram had outgrown my capacity to personally finance it.” Bonzo was a prime candidate for partnership because of its financial muscle and R&D facilities, not to mention its existing relationship with Gram, which distributes Bonzo’s products. In return, Bonzo would consolidate a market for itself “because then I wouldn’t buy from someone else.”

But Bonzo’s idea of partnership included buying 51% of Thadani’s firm, largely for accounting purposes and to satisfy its shareholders. After some soul-searching, Thadani decided ownership was less of an issue than his desire to continue running the business his way. “I didn’t want to be bogged down by being assimilated into a large corporation where things move more slowly,” he says.

A little more than a year later, Thadani is still running things his way, thanks to a detailed partnership agreement that asserts his control of company strategy and management. The partnership seems to be paying off. Thadani’s 2003 revenue topped $11.8 million, up from $9.1 million the year before.

Know what you want

Villeneuve’s partnership push came with caveats, too. The primary condition: if Cott wanted to work with Iroquois, it would have to buy in. While a co-packing agreement with Cott would break Iroquois into new markets, Villeneuve really wanted to leverage Cott’s purchasing power, financial resources and corporate cachet — an alliance with Cott would make the industry stand up and take notice of Iroquois. For its part, Iroquois would spend the time and money needed to upgrade its reporting systems to the standards required by publicly traded Cott, and it would devote the bulk of its production to satisfying Cott’s needs. “We weren’t just dating,” says Villeneuve. “We wanted marriage.”

That 15-minute meeting stretched into three hours — even Benadiba stuck around for 30 minutes — and ended with Villeneuve striking a tentative deal in which Cott would purchase a 30% stake in Iroquois. Two months later, with Cott’s guarantee, Iroquois’ much-needed bottling equipment was being installed at its plant on Cornwall Island.

Iroquois could have done much worse, notes Colero. He says companies pursuing relationships with much larger businesses often start from a weaker negotiating position. Unless they’ve considered their dealbreakers, they tend to bend too much. Colero credits Villeneuve with having thought through in advance what he wanted from a partnership and then going after it.

Hire the help you need

Thadani spent “a bundle” on the lawyers, accountants and business valuators who helped forge his deal with Bonzo. Negotiating without their assistance would have been dangerous, says Thadani, since he had worked for Bonzo in the past and its president and CEO, Anthony So, was one of his mentors: “It’s almost like family negotiating.”

Thadani overcame the challenge by leaving much of the nitty-gritty to the lawyers. When he did get involved, Thadani kept his negotiating tactics low-key and respectful. “You make requests and talk about issues rather than saying, ‘No, this is my bottom line. This is what I want!'” he explains. The fact that Thadani was familiar with the national and corporate culture of his potential partner has made for a more successful partnership all along, he says: “We know the way they tick.”

Hash out a detailed partnership agreement

A well-planned partnership agreement can go a long way toward protecting smaller companies from the dangers of allying with a much larger entity, says Colero. He suggests starting out with a letter of understanding that confirms a discussion about the partnership, including the objectives and how you see the relationship evolving. If negotiations involve the sharing of proprietary information or intellectual property, then the letter should also include non-disclosure and/or non-compete clauses.

Once a general understanding has been reached, you’ll need a legally binding contract that should include details of liability and risk-sharing, cash-flow arrangements, rights and responsibilities, and how you’re going to protect assets such as intellectual property. “The agreement should set specific goals and clarify what both partners stand to get from the relationship,” adds Colero.

Cary Schuler, co-founder and business development director of Cronus Technologies Inc., agrees that the key to keeping a partnership on track lies in the early planning. The Saskatoon-based developer of human resources management software has 10 partners, including Sun Microsystems and Arlington, Tex.-based PartnerComm Inc., which market and bundle Cronus’s software with their own. “It works well for us,” says Schuler. “It’s a way to get market access and grow quicker than trying to be a direct marketing force.” Works well may be an understatement: after snagging its first partner in 2000, Cronus’s sales shot from $198,000 to more than $1.1 million two years later.

Schuler gives the contracts more oomph by “building in some kind of metrics about what each party will contribute, where we each might be able to generate revenue and what those numbers look like.” Often, he requests that the partner come up with a marketing plan to indicate how they intend to promote Cronus’s products. “If they’re not willing to make the effort,” says Schuler, “they’re probably not all that keen.”

Finally, suggests Colero, a partnership agreement should build in a process for dealing with problems. Since smaller companies often don’t have the money to take a large partner to court, they should insist on an arbitration clause. Typically, the dispute-resolution process starts with mediation and culminates in binding arbitration; the adjudicator is chosen by a commercial arbitration body named in the contract. If this organization resides in the smaller company’s jurisdiction, all the better.

Safeguard your secrets

There’s a fine line between cooperating with your partner and giving them the tools they need to replace you. Even a contract protecting your intellectual property (IP) is no guarantee. “If that contract is ever contested,” says Colero, “the bigger partner may well have the legal resources to win.” So take early steps to make sure your secrets are secure.

Randy Pilon, CEO and founder of Mississauga-based Virox Technologies Inc., echoes that advice. Before seeking deep-pocketed partners in 2000 to help grow the producer of cutting-edge anti-bacterial disinfectants, he placed a pair of patent-pending designations on the product. “Sure, in some cases patent-pending can mean nothing. At the minimum, it can be little more than putting a date on an idea,” says Pilon. “But we had a novel, defensible product and knew that initiating the patent process would give us some protection.” For Pilon, protecting the product was paramount. “No matter what offers came our way,” he explains, “we were adamant that Virox would always own the IP.”

After identifying potential partners, he requested that each and every company that expressed an interest in the product enter into a non-disclosure agreement up front. “If they refused,” says Pilon, “the conversation stopped there.”

Ultimately, 17 major organizations agreed to respect the request. In 2002, Wisconsin-based JohnsonDiversy, a US$3-billion-a-year cleaning products manufacturer, bought 22% of Virox, then a $4-million company. Best of all, the giant left the IP in Virox’s hands. “The bottom line is we got what we wanted because we acted like a big company,” says Pilon, “even though we weren’t.”

Don’t put all your eggs in one basket

When Cott lost a key U.S. account last year, Iroquois’ business dropped by 85%.”It’s difficult when somebody like Cott comes along,” explains Villeneuve. “Their customers are so large, you’re euphoric — you’ve got all this business coming in and trucks coming and going, and growth. Then something goes wrong, and bing! You take one right between the eyes.” Although he has replaced 45% to 50% of the lost business by producing new bottled-water products and finding new customers for the old lines, the experience taught Villeneuve a valuable lesson. “You’ve got to diversify,” he says. “You can’t be reliant on your partner alone to bring you business.”

© 2004 Camilla Cornell

Originally appeared on PROFITguide.com