Partnering for profit: strategic alliances and joint ventures are advancing revenue growth of small enterprises

Black Enterprise, June, 1996 by Carolyn M. Brown

If the 1980s was the decade of mergers and acquisitions, then the 1990s is sure to be known as the decade of strategic alliances. From licensing agreements to joint ventures, these deals involve two or more companies or business partners actively sharing the risks and rewards in a business enterprise or a project that is owned or operated for their mutual benefit.

Companies that use strategic alliances are growing much more rapidly than those that do not, according to a recent survey conducted by Coopers & Lybrand, a New York-based international professional services firm.

"Joint ventures are hot," says Sam Starr, a partner with the firm's national tax office, who works with companies seeking joint ventures and strategic alliances. -We are seeing joint ventures in every industry. America's growth companies are wise to capitalize on this trend."

The survey was based on interviews with CEOs of 428 product and services companies identified as the fastest growing U.S. businesses of the past five years. The companies ranged in size from $1 million to $50 million in revenues.

Firms currently participating in joint ventures are growing 37% faster than their nonparticipating peers Those involved in international joint ventures expect the greatest revenue growth over the next 12 months, 63% more than nonparticipants. In addition to faster growth and shared economic risk, other benefits are new product development and acquisition of marketing or distribution expertise. CEOs consider joint ventures important to profits. In fact, they estimate that an average of 13.9% of their company's current revenue growth is attributable to such efforts.

In the last two years, there have been significant joint ventures involving African American entrepreneurs, further indicating that this trend is here to stay. Take, for example, David Ellington, president of Oakland-based NetNoir, who struck a deal with America Online, the fastest-growing commercial online service provider with over 2 million subscribers.

STRUCTURING JOINT DEALS

Companies forming joint ventures must look at both business and tax issues of such partnerships. A joint venture essentially creates a third company, says Kathryn Rudie Harrigan, the Henry R. Kravis professor of business leadership at Columbia University. In addition to agreeing on the target customer base and type of product or services to be rendered, notes Harrigan, the participants must have a clear understanding of each other's roles and the controls used to guide the alliance.

From a tax point of view, owners should take into account the compensation of members that provide services, finding the right legal structure and shifting liabilities among joint venture partners. Companies should also look at the allocation of income, gain, loss or deductions among partners. Moreover, is appreciated or depreciated property being contributed to the joint venture?

"We see more problems from contributions of appreciated properties than from any other area," says Starr. For instance, "partners often underestimate the significance of contributing appreciated property to the joint venture, which can fundamentally weaken the economics of the deal for themselves and their partners."

Initially, major attention should be given to the type of legal entity employed in the joint venture. Most are either a partnership or limited liability company (LLCs). A new form of business recognized in every state except Vermont and Hawaii, an LLC allows the pass-through of income and loss to individual owners and avoids the double tax imposed on corporate earnings.

Also, devise a formal exit strategy, such as a cross-buyout agreement, planned external sale of the entity or an initial public offering.