Strategic Alliances: Leverage Strength and Minimize Weaknesses

MARK THOMSON, CPA

The merger and acquisition market has been hot for manufacturers in the first half of 2016, and the momentum is expected to continue through year-end. However, some business owners are uncertain about buying and selling.

A strategic alliance may be a worthwhile alternative for gun-shy owners. Over the short term, it offers the best of both worlds: You retain control over your business and also having access to your partner’s resources. Over the long run, a strategic alliance provides an opportunity to test whether your partner could be a good fit for a future merger.

A strategic alliance also creates an opportunity for owners to grow their business or expand their product lines, leveraging off of another company already experienced in that area.  This can significantly reduce the risk of expanding organically and accelerate a growth opportunity.

Is a Strategic Alliance Right for You Now?

Think of a strategic alliance as a near-term growth and expense-cutting mechanism that offers potential long-term benefits. Initially, you should focus on such objectives as better economies of scale. For example, by combining orders for everything from raw materials to office supplies, both companies may qualify for supplier discounts and be able to reduce overhead costs.

Or, you may want to find a partner to:

• Improve transportation logistics by consolidating warehouses;
• Jointly purchase manufacturing equipment;
• Upgrade your IT network or accounting system; or
• Share intellectual property such as customized software.

Additionally, a strategic alliance could help you build a presence in an unfamiliar market sector. For instance, your partner’s more experienced sales team could be instrumental in introducing your products to new geographic territories where your partner is already well known.  We often hear of the difficulty in finding good experienced sales personnel, so using your partner’s existing team allows you to saturate your targeted market immediately.

What Will the Partnership Evolve Into?

Successful alliances also help the partners envision what a permanently combined organization might achieve. It is not uncommon for a strategic alliance to begin informally or as a short-term agreement and eventually lead to a merger when the two companies realize that together they are more than the sum of their parts.

A prior relationship can improve the chances that the merger process will go smoothly. Before joining in a strategic alliance, companies typically perform due diligence on each other and consult with their legal advisors.

The experience of this type of venture will give you confidence in the future to pursue other opportunities and the knowledge of how to evaluate the potential risks and rewards.  There is no replacement for experience in helping business owners get comfortable assessing the next partnership or merger candidate.

Financial conditions, among others, can certainly change between the initiation of a strategic alliance and the beginning of merger negotiations. However, a good alliance allows companies to keep tabs on each other. If one of the companies experiences leadership challenges or has trouble getting financing to make a major purchase, the other is likely to know about it. Such knowledge can speed up the M&A transaction process and make integration much simpler.  Often, the willingness of each partner to share information is an indication of how well the alliance will work.  The more open the relationship, the easier it is to leverage off of each other’s strengths and make corrections together as problems arise.

What is Your Backup Plan?

Unfortunately, strategic alliances do not always last. If the alliance is merely puttering along — or worse, proving a drain on resources — you need to take immediate action.

Some problems can be fixed. For example, it is easy for alliances to drift from their original purpose. A partnership forged mainly to upgrade information technology could wind up focusing on improving employee productivity, with mixed results. In this case, the partners should work together to bring the organizations’ focus back to the agreed-upon set of goals. If the goals are not clear, the partners should clarify them.

Other problems are irreparable. Your partnership agreement should specify conditions and processes for unwinding the relationship if the need arises.  Make sure your agreement considers not only the financial aspects but also cover personnel and customer issues to make sure you are protected.

Who Will Be Your Partner?

The key to successful strategic alliances is finding the right partner. It is often a competitor, supplier or customer; it also could be a company outside your supply chain that’s looking to expand into new markets. Your legal and financial advisors can help find a partner that is a good fit today and has the potential to grow with your business over the long haul.

For more information, contact Mark Thomson or your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.

The Importance of Using Qualified Employee Benefit Plan Auditors

BRANDON VAHL, CPA, CFE

If your company provides an employee benefit plan, and it has 100 or more participants, you are generally required to have the plan’s annual report (Form 5500) audited under the Employee Retirement Income Security Act of 1974 (ERISA). Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Watch Out for Deficiencies

A recent study by the U.S. Department of Labor (DOL) revealed that four out of 10 employee benefit plan audit reports contained major deficiencies with respect to one or more relevant Generally Accepted Auditing Standards (GAAS) requirements. These deficiencies would lead to rejection of a plan’s annual report and put the plan participants and beneficiaries at risk.

Of the 400 plan audit reports reviewed by the DOL, 17% failed to comply with one or more of ERISA’s reporting and disclosure requirements. The DOL’s findings underscore the importance of selecting an experienced public accounting firm that specializes in handling employee benefit plan audits.

Select a Qualified Auditor

In addition to requiring employee benefit plan auditors to be licensed or certified public accountants, ERISA guidelines require auditors to be independent. In other words, they cannot have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition.

Experience is another important selection criterion. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data and party-in-interest and prohibited transactions.

Ask Questions

The conclusion of audit work is a good time to ask questions, such as the following:

• Have plan assets covered by the audit been fairly valued?
• Are plan obligations properly stated and described?
• Were contributions to the plan received in a timely manner?
• Were benefit payments made in accordance with plan terms?
• Did the auditor identify any issues that may impact the plan’s tax status?
• Did the auditor identify any transactions that are prohibited under ERISA?

In addition to providing an opinion, your auditor’s report will highlight any problems unearthed during the audit. Experienced auditors can suggest ways to improve your plan’s operations.

Protect Yourself and Your Employees

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company cannot afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. If your CPA does not provide this service, ask him or her to recommend another specialist to audit your plan.

For more information, contact Brandon Vahl at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.