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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Jim Martyka
April 2003

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Financial guide: Choose your partner

Choose your partner

“We need help. We need money. We need a strategic partner.”

That’s been a mantra of sorts over the past year for Minnetonka-based LecTec Corp, a medical products manufacturer that has seen the effects of a softening industry, an economic downturn and less demand from customers.

The result: a significant drop in revenue and a loss of cash that was once planned for expansion. The company has felt the immediate pressure to hunt for financial solutions. In LecTec’s case, that means finding a strategic partner.

“The truth of the matter is that these are difficult times for a lot of companies and many of these companies, like us, need money and additional support to thrive and survive,” says Rod Young, chairman and CEO of LecTec.

“We want to get a partner in here that can bring some financial support, so we can continue to grow our brand and grow our company.”

LecTec is far from alone. In these harsher economic times, when it seems every small and mid-sized firm is looking for money, strategic partners are becoming a popular option.

Often a larger firm, such partners bring in marketing power, distribution channels, solid business plans and most important, financial support. Essentially, these firms bring in everything a small business needs to survive.

But there is a price. These partnerships often mean sacrificing quite a bit of control in the firm and bringing in some new bosses with their own agendas. Plus, these deals are often long-term and complex, especially when it comes to day-to-day operations. And business owners warn that there is a fine lime between these partnerships and straight up acquisitions these days.

The point being that while these alliances can help companies, owners must proceed with caution.

A million ways

“There are a million different ways to structure these deals and set up how these partnerships are going to work as well as how they are managed,” says Thomas Murtha, a professor of strategic management at the University of Minnesota’s Carlson School of Management in Minneapolis. “What’s important for small businesses to do is to know exactly what they are looking for in a partner and find one that is willing to provide whatever that is.

“But, these companies must also remember that they will have to make some sacrifices,” he says.

“These alliances require total participation from both sides in order to work, on any level.”

There is no real clear-cut definition for strategic partnerships or how they work. Essentially, each deal is set up differently, depending upon what exactly it is the two sides are each looking for from the other.

These deals also tend to cross industries, in that they work for just about any and all types of companies. However, for the most part, these deals consist of a larger, more established firm coming in and providing some form of service, support or even products to help out another smaller (and often struggling) firm.

In turn, the smaller firm often offers a piece of the company, anywhere from a few percentage points to a majority ownership, which is where these partnerships start to cross over into acquisition land. These smaller firms will also often provide their products or services to their partner’s customers.

While it seems like the smaller firms are giving up quite a bit, they do get a lot back if they have a strong partner. A larger and more established partner can bring to the table marketing power, operations management, more manufacturing capabilities, a whole new set of customers, a powerful reputation and of course, an instant infusion of cash.

“These types of partnerships can really save a company in trouble because of everything a larger company can instantly provide,” says Mike Ryan, director of the Small Business Development Center at St. Paul-based University of St. Thomas. “And there is really nothing more valuable than the financial support.”

Boosting production

That financial support is exactly what LecTec is looking to get. Because of softening contract-manufacturing demand, a hurting economic market and even mild winters that have affected sales of LecTec’s top cough and cold products (under the TheraPatch name), revenue is down. The company, now hovering around $10 million in sales, has seen a steady decline for over a year.

“We want to boost distribution of our TheraPatch products with the hopes of increasing sales. But we need cash to boost this production,” Young says. Young would not disclose how much the company is looking for. However, he did say the firm has had some positive interest from other firms. He also noted that past partnerships with health care and medical companies Johnson & Johnson and Novartis have helped the firm in the past, especially in terms of marketing.

Advertising and marketing is one area where a lot of small companies bring in strategic partners. In many cases, these firms realize the importance of a strong marketing plan and their inability to market themselves effectively, experts say.

Such was the case for St. Paul-based Ruckus Interactive, a designer of Web sites and intranet and extranet systems. Formed in 1996, the $1.2 million firm was building a reputation for high-quality work, but was also getting lost in the dozens of e-system development companies that were popping up. Recognizing the need for strong marketing, the company looked for a partner and found one in Russell & Herder Inc. Sacrificing about 20 percent of the company, Ruckus got its partner and a strong presence.

“We didn’t really have a choice, we needed help in this area,” says Bob French, a principal at Ruckus. The 20 percent “was a lot to give up, but it’s enabled us to compete in brand-building. And we’re one of the top 25 developers in the Twin Cities because of it.”

Even with all of the pluses that these partnerships can bring, small businesses need to be aware of the costs. Experts say that 20 percent stake Russell & Herder took is low in comparison to many other deals. If a company isn’t careful, it could find itself sacrificing quite a bit for a service.

Plus, these partnerships bring a whole new set of people into the lives of small business, all with their own agendas and a serious interest in the success of the company. Simply put, these partnerships can bring in a whole new set of “bosses.”

Such was the case with a small local retailing firm. One executive, who asked that she and her firm remain anonymous, said a strategic partnership from last year has felt at times like a takeover as the larger partner continues to bring forth operational “suggestions.”

“There is a lot more interest from the partner than we anticipated,” she says “They have a large stake in our firm, so it makes sense that they want to be involved. The problem is that we don’t always agree on how something should be done and the relationship has been in trouble quite a few times.”

Goals and roles

The solution, experts say, is a lot of discussion on goals and roles of the partnership before either party jumps in. Then, put a plan and the structure of the deal in writing and adhere to it. “Then there’s no room for confusion,” Murtha says.

The other piece of advice experts have for small companies looking for partners is to be willing to be flexible. Finding a strong partner is becoming harder and harder for a number of reasons, so companies need to remain open to giving in order to receive.

“If a company is in a position where they are hurting financially and they need a partner, chances are they aren’t too attractive to a larger firm,” Ryan says. “A larger firm isn’t going to partner with a smaller firm unless they are getting something in return, so small businesses need to be open to that.”

Experts also say that shouldn’t ever mean compromising the business.

“Remember that a strategic alliance or partnership is supposed to help both parties achieve what they want,” Murtha says. “The partnership has to fit both strategies and parties must be willing to give, receive and work together to make it successful.”

bfrench@ruckusinteractive.com. Thomas Murtha, Carlson School of Management, University of Minnesota: (612) 624-8214; murth004@umn.edu. Mike Ryan, Small Business Development Center, University of St. Thomas: (651) 962-4500; mpryan@stthomas.edu. Rod Young, LecTec Corp.: (952) 933-2291; ryoung@lectec.com.