Selecting Good Partners: The Seven Essential Types of Due Diligence

Six of ten alliances collapse at some point down the road, because one or more of the partners failed to do their due diligence.

Usually, strategic alliances do not involve the protection of a legal agreement. As a result one or more of the partners may be exposed to undue losses when things don't go well or to wrangles over revenue and ownership when a joint effort is successful.

A partner that you first saw as committed and enthusiastic, may appear to be a dreamer and unrealistic at a later stage. A partner supplier who participated in helping you develop a product or service could suddenly act like a supplier and come after you like you've never had an alliance to begin with. Before you engage a partner, learn the following:

1. Management Strength and Integrity – Who runs the company - senior officers and board of directors? Are these people dealing from strength or weakness? Do they deal with integrity or are they the kind to cut corners or look the other way? Do they have a litigation history?

2. Short-term Objectives and Long-term Goals – What is your prospective partner's corporate strategy? What is their partnering strategy? What will they gain by partnering with you? Are their objectives compatible with yours?

3. Performance Rating – Is their organization efficient? Is it flexible? Is it focused? Do they have other partners? How well have these alliances performed? How well have they performed in the past? Regarding: quality of goods or services, speed of delivery, pricing and management response to solving problems.

4. Capabilities and Innovations – What are their capabilities: past, present and future? How committed are they to investing in capabilities that would benefit your business? How creative are they? Are they unique and innovative?

5. Financial Considerations – What is their credit standing? Are they profitable - as measured by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)? Are they growing? At what rate – as measured by CAGR (Compound Annual Growth Rate)?

6. Resources and Employees – Do they have the resources to deliver on their end of the partnership at the scale required? Do they have the staff or outsourcing to fulfill your orders? Are there unresolved issues with labor or former employees?

7. Risks and Compatibilities – Are your trade secrets safe with them? Is their company a fit with your company in regards to markets and cultures? Are they looking for an exit strategy? How would a change in management or ownership affect your alliance? Will they be sold in the near future or right after they close the deal with your company? Is your partner planning on bringing in new investors? How can you get out of a failing alliance? Who will own new intellectual property rights and patents produced by your partnering?

Before you make contact with the prospect partner conduct as much research as is available to you. A second, more comprehensive and mutual due diligence phase must be undertaken once both parties have agreed to embark on negotiations. You will want to personally visit your prospect partner’s offices or production facilities.