How to avoid jumping into bed with the wrong local business partner
March 31, 2014
One of the early challenges for many businesses entering a new market for the first time is finding suitable local business partners. In some markets (including many in the Middle East, for example) this is a legal requirement and often the local partner has a controlling stake in the venture.
Local market knowledge
Even if having a local partner is not required, having a trusted local advisor who knows the market can be reassuring, provide access to local networks and insight into local working practices and business culture. But the choice of partner is often guided more by a personal reference or simple acquaintance than by careful consideration and selection.
Knowing your partner
Given the reliance businesses often place on these individuals, understanding exactly who you are working with and their position in the local market – before committing to a long-term relationship – is a prudent investment of time and resources. This is particularly so when entering a post-conflict environment, or one where the political situation is in flux (Egypt, Thailand, Ukraine and Venezuela would all fit into this category).
Recent corporate history is littered with examples of companies who have failed to do enough due diligence. Often this is because personal rapport drives the relationship and the positive perception of the local partner are untested. The confidence of the investor is often undermined by problems or poor performance only after the deal has been done. That can entail significant financial and reputational cost, not to mention management time.
It’s worth remembering too, that the liabilities (and past indiscretions) of your proposed partner will become yours if the deal does go ahead. Appropriate levels of 'reputational' or 'integrity' due diligence are therefore increasingly seen as a standard part of the broader due diligence for companies operating in mergers and acquisitions. It is especially important when those deals involve new markets where the investor has little or no institutional knowledge.
And informing your strategy
Beyond the narrow focus of potential joint venture partners and other third parties (such as agents and distributors), integrity due diligence can also provide a broader perspective of the principal actors and influencers in a market. That can be government agencies, trade bodies, regulators or even the competition. Understanding these dynamics, and their potential impact on your venture, can help inform both strategic and tactical decisions as you plan your next move.
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