As a small business owner, creating a partnership with another small business can be a great way to build a mutually beneficial relationship. Unfortunately, partnerships come with risks, which need to considered and properly assessed to ensure relationships can come to fruition and ultimately, be successful for both parties.
America has more than 30 million small businesses, according to the Small Business Administration. That's a lot of organizations with wide degrees of solvency. With so many options, it can be daunting to decide which companies to partner with.
If a partner company ceases its operations, your cash flow is at risk of being disrupted or stopped suddenly. Even worse, if a partner is involved in fraud or misconduct, your reputation could be severely damaged.
You can try to avoid these pitfalls with diligent research into an existing or potential partner's financial issues, late payments, or conflicts of interest. Checking their credit profile before entering into an agreement with the company and monitoring operations after you've formed a relationship can help keep you educated and informed.
A cash-strapped company without established business credit can be a much greater risk to your business than one on solid footing. However, it is important to remember that it's impossible to predict the future. CEOs, employees, trends, and markets can all change dramatically and impact your partner’s solvency for better or worse.
Factors that are out of the company's control might also influence your decision to form a partnership. A business's location could make the company and its resources more susceptible to natural disasters. Market or political changes can cause shockwaves as well. And for many small businesses, there is little cushion to absorb the shock when these problems arise.
But all this is not to say that partnerships should be avoided. Many small and midsize businesses can bring great value to your company through a strong relationship. Here are three steps you can take to make sure that relationship begins on firm footing.
1. Check the company's – and your own – payment history and credit profile.
When a business is just starting out, it's often focused on making ends meet and the short-term needs of the company. Making and sustaining a profit are the primary goals. But once the dust has settled, there is time to think about the long term. Loans and partnerships are two common ways to expand one's business widely and rapidly.
Many small businesses are conservative, but nearly half of them have financial support coming to them from external sources, according to an analysis from Dun & Bradstreet and Pepperdine University. Because of this, many businesses you consider for partnerships will have credit profiles for you to check. Using their business credit profile, you can see whether they have had any difficulties making payments on time and ultimately assess the risk of a partnership.
Of course, many of the companies you partner with will perform the same analysis on your business. It can be wise to make sure you have a solid business credit profile before you begin a partnership to ensure you're putting your best foot forward. A strong credit profile will not only reflect your credibility to future partners, but it will also demonstrate the good financial health of your company, which indicates that you are ready for expansion. It can also reflect strong management and organization within your company's internal operations, which is another way to improve your appearance in front of potential partners. This can, in turn, enhance your business's attractiveness and increase your leverage when negotiating the terms of a partnership.
2. Ensure the business has a solid supply chain.
A partnership involves more than just CEOs and employees. In addition to the customers they'll share, two companies in a partnership also share the same supply chain.
In some ways, a partnership can alleviate some of the problems that arise within a supply chain. Sharing the same data and metrics accelerates the process of due diligence. More eyes on the links in the chain also mean more opportunity to iron out disruptions and inefficiencies.
But supply chains are complex. And with more complexity can come more risk. These days, customers are more demanding about how companies source their goods, and they want to buy from companies with responsible and sustainable supply chains. Maybe your company has taken steps to ensure a green, ethical supply chain. But if your partner's supply chain does not reflect your values, this can result in a major step backward for your business.
One bad link in the chain could lead to legal action and noncompliance fines, which is why it's important to be diligent and thorough when evaluating this aspect of a potential partner's business. Not doing so could irreparably damage your company's reputation. Before entering a partnership, consider looking into where your new partner is getting its materials and supplies.
3. Consider the effects of potential disasters.
Anyone who has spent enough time in business has weathered a few disasters. Some can be learning experiences, which helps us avoid them moving forward. Others are inescapable, and you just have to do your best to mitigate their effects and move forward.
Natural disasters are unfortunately unavoidable. Mother Nature doesn't look at your financial statements before conjuring a storm, and for small businesses, the effects can be especially brutal. The majority of small businesses that are located in areas affected by natural disasters lose revenue.
For example, if you're considering a partnership with a supplier in an area that's susceptible to hurricanes – like Miami – and it's hurricane season, you might want to proceed with caution. Of course, you shouldn't rule out all SMBs in areas prone to natural disasters, but you shouldn't ignore those factors either. That company in Miami might have its warehouses in a secure location, or it could have enough cash flow to cover its losses. But partnering with a business without those types of safeguards could open your company up to severe risk. Do your due diligence, and don't be afraid to ask your potential partners about their safeguards.
You can also be proactive in safeguarding your business by developing a plan of action in case a small business partnership goes south. What will you do if one of your business partners faces a natural disaster and is unable to continue operating? What will you do if one of your suppliers violates regulations and you are no longer able to continue working with them? Accidents are bound to happen, and due diligence is not a perfect process. You can help secure your business by planning how you will continue to monitor your small business partnerships, how much cash or inventory you will need on hand, and how you will interact with your clients should one of these scenarios occur.
Despite the risks, a partnership with another small business is a great strategy for small business growth and expansion. Working in partnership, two small businesses have a stronger cash flow, more resources, and a wider network than one. Finding the right business to partner with can be tricky, but there is plenty of data available for you to make the right decision and plan for potential crises ahead of time.