May 2018
Volume 9, Issue 5

Partnership vs. Acquisition

There are pros and cons to every new business relationship

Nick Azar

Rapid advances in technology have played a major role in shifting the dental laboratory industry from service-oriented to manufacturing. With this change, many new relationships have developed—including some partnerships and acquisitions. But what is the difference, and how does one determine what's best for their business? First, we must understand what each relationship is and what it can mean for the businesses that engage in it.

A partnership is a very simple business structure that needs only a handshake to approve. Often, it helps a business achieve more than it could on its own. At its most basic, a partnership brings together two or sometimes three businesses to form one new, combined entity. Control of the new business is usually divided among the partners utilizing their core strengths. A great partnership is one in which all partners are compatible, able to both complement each other's strengths and make up for their weaknesses.

In an acquisition, one business buys another to become the new owner. Usually, the acquired business will no longer exist. Thereafter, the combined business often becomes much more valuable to its owners, customers, and employees. 

There are certain facts to consider before a laboratory decides to partner with another business or be acquired by it. At the most basic level, the owner must ask what they stand to gain from this new relationship and what resources would the new relationship allow them to access?

A laboratory owner considering these relationships must first assess their needs. What do they need to gain through a new relationship? Do they require new customers, technology, staff, or investments in order to stay competitive or grow? Are personal reasons such as larger profits or a better work-life balance the reason for the change? There are any number of reasons for seeking to change the trajectory of one's business; however, those reasons can help determine which of the two options to choose.

The following are some basic pros and cons of partnerships and acquisitions.

Partnership

Pros

• Share management/ownership responsibilities with two or more people, making the workload more manageable.
• Have a sounding board to check your ideas and thoughts.
• Help you achieve the work-life balance that you have been seeking.
• Have someone else to care about your business just as much as you do.
• Get more money to fund new projects or simply help with existing ones.
• Obtain more qualified and trained technicians and support staff that can bring immediate contribution, which can impact long-term profitability.
• Gain access to valuable partnership that can have a larger impact on the long-term value of your business and could help you stand out from the competition.
• Get to know more people very fast in the industry.
• Become a part of a larger network that keeps you informed, about everyone and everything.

Cons

• Often requires learning a collaborative work style that is new to everyone or choosing one "legacy" work style over the other.
• Need to nurture partner relationship throughout or the partnership could fail.
• Share decision-making and profits with partner. Now, you have to ask someone else for their opinion, and it is vital to making the final decision.
• Share risk with your partner, and need to get their buy-in prior to going forward. It's not your risk alone anymore.
• Learn how to weather disagreements, as they could cause rifts within the partnership.

Acquisition

Pros

• Access additional customers, employees, and assets.
• Build market share by gaining access to geographical regions and valuable customers that are fully vetted and ready to yield profits.
• Withstand rough economical times more easily by enhancing profitability and diversification and increasing market share.
• Achieve the desired growth for owners and investors.
• Increase bottom line profitability once entities have completed the acquisition. (Historically, expenses are consolidated immediately, which results in profit.)
• Minimize risks of market's and customers' reaction to your expansion, and minimize your cost to developing new territories, products, and services.
• See immediate and long-term tax advantages.

Cons

• Increase the acquisition cost from what was anticipated if the financial benefits were not projected accurately.
• Risk financial detriment to the investors if the company being acquired turns out not to have enough value to justify the investment.
• Risk losing key employees and customers if combining the two companies is not executed carefully and effectively.
• Find the wrong company to acquire. Poorly matched partners can result in losses by the buyer and ultimately leads to a failed acquisition.
• Get distracted from day-to-day business practices by addressing urgent acquisition challenges. The investors and shareholders ultimately pay the price of a long wait to appreciate the benefits of an acquisition.

Conclusion

While most business owners want total control over their companies, it is not always possible, especially within a competitive market. Sometimes it's also not possible to scale the business fast enough to make it valuable to either investors or buyers when the laboratory owners are ready to sell and retire. Developing business partnerships or selling one's business are possible ways to address these challenges.

The author supports the idea of a three-phase exit strategy. First, build the business to a point that it is profitable. Second, bring on a partner roughly 10 to 15 years prior to your retirement. Once that relationship is developed, consider acquisition, strategic alliance, joint ventures, mergers, etc, to finalize your exit strategy and accomplish your retirement objectives.

Experience suggests that it works better for all parties involved if they partner up first before deciding to purchase or merge together with another laboratory. It's more valuable to partner up with your competition. Experience also suggests that mergers are more likely to fail when the expectations on returns are not realistic. Good acquisitions result in financial gain for all parties involved.

 Whether considering a partnership or entertaining the idea of acquiring another laboratory, the laboratory owner/manager should ask themselves three things: Is this new relationship vital to what my business does and where I want it to go? Is it vital to making my business more valuable to investors and employees? Is it vital to making me more profit? Identifying the decision-maker's highest priority is the very first step to address these questions and more.

 

About the Author

Nick Azar is a DAMAS consultant, a business strategist, an executive coach, and the founder of Azar Associates in Santa Clarita, California.

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