Canadian Rental Service

News
Creating alliances to grow

Investment Strategy: Rental companies with minimum resources need strategies to survive and prosper.


May 13, 2008
By Mark Borkowski*

Many small rental companies do not directly control sufficient resources to make the necessary investment to grow their businesses and so may find themselves at a competitive disadvantage relative to their larger rivals. In an effort to build strategies necessary to navigate a profitable course in the demanding rental industry, they may investigate the possibility of leveraging strategic alliances.

In her book, Alpha Dogs (Collins, 2005), author Donna Fenn states that “every year, 10 percent of small businesses… shut down for good, a quarter of all businesses never make it past their second year, 60 percent close after six years.” Yet, even as small and medium sized enterprises face these odds, there has never been a better or more exciting time to open an independent rental operation, or a more critical time to begin transforming your established rental company into a ‘leader of the pack’.

However, successful small business owners are realizing that if they are going to make it, they are going to need help and one of the places they are finding help is through the formation of small business alliances. Small to medium sized rental companies are faced with an increasingly challenging external environment due to the complexity of the rental industry: multiple product knowledge, changing distribution channels, the rapid development of software technology, fleet management practices and competition from larger multi-branch competitors. For rental companies with minimal resources, the challenge of building strategies to survive and prosper in this setting is difficult but attainable with suitable investment decisions.

One method is creating vibrant new alliances and partnerships with other similar rental operators to not only compete with the bigger players in the rental world, but also to attract local customers which, countless consumer surveys indicate, are more receptive to smaller businesses.

Alliances can take the form of entering into a sub-rental contract with another company or even simply
engaging in a referral swap to keep customers between them. A good example of this in the Canadian
rental industry is the Lou-Tec Group in Quebec where several independently operated rental stores have grouped themselves under one common banner to share marketing costs, increase their buying power and extend brand awareness much farther than each store could individually.

22a

Another form is to join business associations who’s members are principals from non-competing, diverse businesses with different skill sets who meet regularly, acting as a ‘board of directors’ to help each other address issues and grow their businesses. For sole proprietors who do not have anyone to answer to, it provides a model to hold them accountable for achieving their business and personal objectives by ensuring they think strategically about growth, and set aside time each month to work ‘on’ rather than only ‘in’ the day-to-day activities of their businesses.

There are many reasons why owner-managers avoid decisions on growth, including concern of engaging debt and loss of personal control to professional managers. Other major barriers to growth are found inside the business, including lack of technical and managerial skill, inadequate organizational adaptability and ability to acquire or use technology.

In some parts of western Canada, such as Alberta, growth may be inhibited by a labour shortage which is compounded by some of the specialized knowledge required in the rental industry. This lack of perceived and real lack of resources for sustained growth reinforces the thought that substantial benefits may be acquired through the development of partnerships or alliances with other businesses, sometimes in the same industry, available to provide these skills.

A Coopers & Lybrand study (Small Business Reports, 1993) of 400 high growth, small firms found that those with strategic alliances experienced growth rates 20 percent higher than firms without such alliances and about 11 percent more sales turnover. Strategic alliances enable a founding rental
company owner and managers to gain competitive advantage through access to a partner’s resources that include markets, technologies, capital and people.

It is important to keep in mind that family ownership creates value only when the founder serves as the CEO of the family firm or as its chairman with a hired CEO. In this way, creating partnerships and alliances while maintaining a direct link to management control is the preferred choice.

For most rental company owners, the task of identifying suitable partners or alliances can seem daunting. As these small businesses grow and the owners realize the importance of accepting new professional managers and expertise, this realization now extends to the acceptance of engaging skilled, experienced and knowledgeable mergers and acquisition intermediaries to facilitate the search and acquisition, and to ensure that the new arrangements are a win-win situation for all parties.

There are many challenges that can emerge to frustrate new strategic partnerships or acquisitions. One of the delicate tasks is to identify the appropriate partner, not such an easy chore as it may appear.
Choosing a partner for business is as complex as choosing a partner in marriage. The shocking statistics are that 70 percent of all partnerships do not make it. Therefore, it is important for you to know as much as possible about each other at the outset. Just like in a marriage and life in general, there will always be situations and times you could not have predicted. Having a skilled adviser help you develop tools for communicating and dealing with the business while tempering emotions and diversions of attention is a wise and cost effective insurance on your financial and emotional investment.

Ideally, strategic partners and alliances can provide extended markets, sales and distribution networks and financing capabilities without giving up ownership. Strategic alliances can allow access to resources that a small to medium sized rental company needs to grow and expand its business. -end-

*Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a mid market M&A brokerage firm. He can be contacted at (416) 368-8466 ext. 232 or mark@mercantilema.com