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Business Development Operations and Procedures

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Carlos F. Camargo, Ph.D. - Realtor, CalBRE #01988431
Carlos F. Camargo, Ph.D. - Realtor, CalBRE #01988431

The document provides an overview of ABC Inc.'s five-step partnering process for business development. The steps include: 1) identifying strategic objectives for partnering; 2) developing a partnering plan; 3) selecting alliance partner targets; 4) contacting alliance partner targets; and 5) creating a proposal. Key aspects of each step are outlined, such as determining strategic needs and bargaining chips, selecting partners that meet certain criteria, and designing responsibility lists for contacting targets. The overall process aims to help ABC Inc. effectively identify and negotiate partnering arrangements that meet strategic objectives.

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Business Development Operations and Procedures Carlos F. Camargo Managing Director Business Development
Table of Contents Partnership Strategy and Process Overview for Business Development Step One: Strategic Objectives for Partnering ß Typical Strengths of ABC and its Alliance Partners ß Understanding the Building Blocks of Partnering ß There is no typical partnering arrangement. ß Partnering Building Blocks: 2-way Mapping of Partnership Objectives ß Determining Strategic Needs/Bargaining Chips Step Two: Developing the Partnering Plan ß A typical plan covers the following types of issues: ß Planning for Multiple Partnering Arrangements ß The existence of multiple arrangements adds another layer of complexity. Step Three: Selecting Alliance Partner Targets ß Ideally, each potential candidate should meet the following criteria: ß Designing the Responsibility List ß Implementation Step Four: Contacting the Alliance Partner Targets ß Corporate vs. Operating Staff ß Recruiting a Champion ß Confidentiality Agreements ß Initial Meetings Step Five: Creating A Proposal ß Valuing the Proposal ß Initial Proposals ß Legal, Tax and Accounting Assistance
Partnership Strategy and Process Overview for Business Development Step One: Strategic Objectives for Partnering ÿ The first step in the ABC, Inc. partnering process is to identify the strategic reasons for seeking such an arrangement with a like-minded or similarly motivated partner, to pursue the following… • Competitive (re)Positioning • Cost Mitigation • Enhancing Market Reach/Presence/Halo • Funding for channel/distribution development • Funding for marketing/technology development • Quality Improvement • Revenue Enhancement • Securing Equity Investment • Securing Services/Products/Capabilities to fill Whole Product Reqs • Time to Market Efficiencies Threshold for Considering Partnerships: A successful partnering arrangement results when the value each obtains exceeds the costs (current and strategic) incurred in meeting the partnership’s objectives
Typical Strengths of All Bases Covered, Inc.s and its Alliance Partners This chart highlights the typical benefits derived by All Bases Covered, Inc. and an Alliance Partner in meeting different functional responsibilities during a product life cycle. Responsibilities All Bases Covered, Inc. Strengths Alliance Partner Strengths Product Development qCreativity Focused development qSpeed qLess developmental bias qFlexibility qBroad market expertise qBroad technical capabilities qBetter lab and test facilities Legal/Regulatory qCutting-edge technology patents qCross-license opportunities qGuidance on regulatory or patent approvals Manufacturing qFaster, low volume capability qPrototyping capability qSpecialized niche manufacturing qComponent purchasing power Tooling and manufacturing qQuality assurance capability Marketing qUnderstanding of niche market qNew technology or new market excitement qCreativity qCompetitive edge qBroad market understanding qEstablished product lines qVolume edge qTrade name recognition Distribution qSpecialized niche distribution qFlexibility qEstablished customer base qEstablished distribution and shelf space qBetter storage and transportation Service/Support qExpertise in new technology problems qEstablished quality standards qWarranty, service and customer support procedures Product Revisions qNext generation capability qBetter product life extension Established user groups
Understanding the Building Blocks of Partnering To achieve All Bases Covered, Inc.’s and Alliance Partner’s partnering objectives, All Bases Covered, Inc. and Alliance Partner must mix and match five partnering building blocks to create an agreement that best meets those objectives. Building Blocks of Partnering ABC Dominant Agreements Partner Dominant Agreements q Development: All Bases Covered, Inc.’s funds development of Alliance Partner’s specific technology or products in return for rights to the resulting technology or products. q Development: Alliance Partner funds All Bases Covered, Inc.’s development of specific technology or products in return for rights to the resulting technology or products. q Distribution: All Bases Covered, Inc. receives the right (exclusive or non-exclusive) to distribute Alliance Partner’s products/services within a particular geographic territory or vertical market. q Distribution: Alliance Partner receives the right to distribute All Bases Covered, Inc.’s products/services within a particular geographic territory or vertical market. q Equity: All Bases Covered, Inc. purchases an equity stake (usually a minority position) in Alliance Partner in return for either a seat on Alliance Partner’s Board of Directors or contractual rights to Alliance Partner’s technology or marketing/distribution/channels. Equity purchases may be supplemented or replaced by options to Alliance Partner stock, loans to Alliance Partner. or an option or warrant to acquire Alliance Partner q Equity: Alliance Partner purchases an equity stake (usually a minority position) in All Bases Covered, Inc. in return for either a seat on All Bases Covered, Inc.’s Board of Directors or contractual rights to All Bases Covered, Inc.’s technology/marketing/distribution/channel. Equity purchases may be supplemented or replaced by options to purchase All Bases Covered, Inc. stock, loans to All Bases Covered, Inc. or an option to acquire ABC. q Licensing: All Bases Covered, Inc receives the q Licensing: Alliance Partner receives the right to
Building Blocks of Partnering ABC Dominant Agreements Partner Dominant Agreements right to use and modify. Alliance Partner’s technology/product/service within a particular geographic territory or vertical market in a broader way than a manufacturing or distribution grant (e.g., OEM agreements or internal use licenses). Licenses All Bases Covered, Inc more information about the technology and typically bear royalties. use and modify All Bases Covered, Inc.’s technology/product/service within a particular geographic territory or vertical market in a broader way than a manufacturing or distribution grant (e.g., OEM agreements or internal use licenses). Licenses give Alliance Partner more information about the technology and typically bear royalties. q Manufacturing: All Bases Covered, Inc. receives the right to manufacture products using Alliance Partner’s technology. q Manufacturing: Alliance Partner receives the right to manufacture products using All Bases Covered, Inc.’s technology. There is no typical partnering arrangement. ♦ Each partnering arrangement is a hybrid of some or all of these building blocks and can be formed during or after the development of the technology/service or product. ♦ Since strategic objectives of individual companies differ, All Bases Covered, Inc. may find that seemingly similar Alliance Partners may be interested in partnering arrangements with very different structures. ♦ To determine which of these building blocks is appropriate, it is important to understand what advantages All Bases Covered, Inc. and Alliance Partner might see in any particular building block.
Partnering Building Blocks: 2-way Mapping of Partnership Objectives Building Block All Bases Covered, Inc. Objectives Alliance Partner Objectives Equity Investment ÿ Capital infusion ÿ Enhance All Bases Covered, Inc.’s market credibility ÿ Strengthen other relationships with Alliance Partner ÿ Access to Alliance Partner’s operating and market expertise ÿ Precursor to Alliance Partner’s acquisition of All Bases Covered, Inc. ÿ Window on All Bases Covered, Inc.’s service/product or market ÿ Influence on All Bases Covered, Inc.’s strategic direction ÿ Strengthen other relationships with All Bases Covered, Inc. ÿ Block competitors from obtaining access to All Bases Covered, Inc.’s technology ÿ Precursor to acquisition of All Bases Covered, Inc. Technology Development Agreement ÿ Access to Alliance Partner’s technology and patents ÿ Funding for All Bases Covered, Inc.’s own R&D program ÿ Access to Alliance Partner’s test and regulatory approval capabilities ÿ Access to All Bases Covered, Inc.’s service/product and patents ÿ Basis for obtaining manufacturing, distribution or licensing rights ÿ Access to All Bases Covered, Inc.’s faster, cheaper and more flexible development capabilities Manufacturing Agreement ÿ Avoid capital expense of building own plant ÿ Ship product more rapidly ÿ Obtain Alliance Partner’s quality and test capability ÿ Use excess manufacturing capacity ÿ Broaden manufacturing capability into new area ÿ Ensure quality of product to be acquired Distribution Agreement ÿ Arrive at specialized vertical or geographic market faster ÿ Get benefit of Alliance Partner’s market reputation and support capacity ÿ Complement and broaden current product line; diversify into new markets ÿ Control sales and service process Licensing Agreement ÿ Royalties from markets that All Bases Covered, Inc. would not otherwise address ÿ Gain access to Alliance Partner’s technology and patents ÿ Gain manufacturing and distribution capability ÿ Incorporate All Bases Covered, Inc.’s service/product into Alliance Partner’s products ÿ Right to change All Bases Covered, Inc.’s service/product itself ÿ Right to use All Bases Covered, Inc.’s service/product in other parts of its operations
Determining Strategic Needs/Bargaining Chips ♦ Once All Bases Covered, Inc.’s objectives and the likely objectives of a prospective partner have been analyzed, the next step is to list ABC’s strategic needs and likely bargaining chips. ÿ “Strategic needs” are those items of strategic value that All Bases Covered, Inc. wants to obtain. ÿ “Bargaining chips” are those items of strategic value that All Bases Covered, Inc. can offer to a potential partner. ♦ Initially, these lists should be as comprehensive as possible. Once the process of selecting specific partnering candidates begins, the lists should be pared down to those items applicable to a given potential partner. ÿ To illustrate, All Bases Covered, Inc.’s strategic needs and bargaining chips lists might look like the following: ABC’s Strategic Needs ABC’s Bargaining Chips ÿ Approximately $5 million in capital, revenues or reduced expenses; ÿ Existing proprietary products, technology or patents; ÿ Distribution capability, particularly overseas or in a defined vertical market; ÿ R&D capability to create a unique product or component meeting Alliance Partner’s specifications; ÿ Customer leads, credibility; ÿ “Influence” on All Bases Covered, Inc.’s future direction, reflected by a Alliance Partner seat on All Bases Covered, Inc.’s Board of Directors or R&D Committee; ÿ domestic manufacturing capability for private label whitebox initiative; ÿ Product manufacturing/assembly capability in the United States; ÿ Related product lines, particularly those that create an opportunity for All Bases Covered, Inc. system sales; ÿ Vertical distribution capability in defined areas or markets; and ÿ Additional technology to incorporate into current or planned products; and ÿ Intangibles, such as the ability to move quickly, market focus, customer awareness, image and reputation in market niche, productivity and trend setting ability. ÿ Sourcing of certain parts or raw materials. ÿ Niche market brand, presence, coverage, or reach
Step Two: Developing The Partnering Plan ÿ Having determined the strategic needs and the current capabilities of All Bases Covered, Inc., the next step is to create a partnering plan. ÿ The key managers of All Bases Covered, Inc. must be actively involved in creating an effective plan. Polling via email or phone at a minimum is both a professional courtesy and invaluable decision-making and –sharpening tool. ÿ The resultant plan will help focus the advisors and management team as All Bases Covered, Inc. goes through the partnering process. A typical plan covers the following types of issues: 1. Strategic, operating and financial objectives that support All Bases Covered, Inc.’s strategy for increasing market share; 2. Strategy for developing the partnering process; 3. Proposed deal structures, including likely alternatives, implications and negotiating limits; 4. Anticipated, realistic timetable; 5. Materials to be furnished to the potential partner: the first information pack to spark interest in All Bases Covered, Inc. and a second set to provide adequate disclosure for Alliance Partner’s initial decision regarding degree of interest; and 6. Target list of partnering candidates by types, with brief reasoning and priorities.
Planning for Multiple Partnering Arrangements ÿ Partnering arrangements are inherently more complex than a “straight” venture financing, acquisition, R&D contract, or manufacturing, distribution or licensing arrangement taken alone. ÿ For a successful partnering arrangement, All Bases Covered, Inc. must meet the strategic objectives of an Alliance Partner and provide an Alliance Partner with (sometimes) substantial rights to All Bases Covered, Inc.’s product/service/technology and market. Monitoring and management are key to continued good relations. ÿ At the same time, All Bases Covered, Inc. must ensure that it does not give away a disproportionate part of its product/service/technology and market to an Alliance Partner in exchange for a minority equity investment or R&D contract. ÿ When making concessions to an Alliance Partner, All Bases Covered, Inc. must consider that it will want to do other partnering arrangements in the future. The existence of multiple arrangements adds another layer of complexity. ÿ It is often helpful to negotiate with two prospective Alliance Partners simultaneously, so as to have an alternative when negotiations get difficult. ÿ When partnering arrangements occur in sequence, All Bases Covered, Inc. should use previous arrangements as a baseline for later negotiations. ÿ A long-term, exclusive grant of rights in one partnering arrangement may limit All Bases Covered, Inc.’s flexibility in creating later relationships unless each agreement is carefully structured to fit into All Bases Covered, Inc.’s strategic plan.
Step Three: Selecting Alliance Partner Targets ÿ One of the most critical issues in the partnering process is determining which companies to approach. ÿ Enormous amounts of time and resources can be wasted with inappropriate candidates that are not likely to meet All Bases Covered, Inc.’s strategic needs. Ideally, each potential candidate should meet the following criteria: • Ability to meet All Bases Covered, Inc.’s strategic objectives; • Strategic objectives that All Bases Covered, Inc. can meet without having Alliance Partner dominate All Bases Covered, Inc.’s business; • Clear need for All Bases Covered, Inc.’s bargaining chips at the operating (not just the corporate) level; • Distinct and non-conflicting target markets; • Familiarity with All Bases Covered, Inc.’s services, technologies, products and markets; • Interest, or successful experience in making similar deals; • No recent major change in identity or organization; • Compatible people and corporate cultures; and • Ability to complete the transaction within the required timeframe. It is difficult to obtain this type of information about potential partners and no one partner will meet all these criteria. Still, gathering this type of information and using it to prioritize the list of candidates will both reduce the amount of time spent with inappropriate candidates and increase the likelihood of success.
Designing the Responsibility List ÿ Once the list of prospective candidates has been prioritized, Business Development or specific members of the management team or Board of Directors, should be assigned the responsibility of contacting one or more of the top-priority targets. ÿ Ideally, the assigned person should have a personal contact within the target Alliance Partner who is already familiar with All Bases Covered, Inc. or willing to learn more. ÿ Only contact a few companies at a time, both to avoid overwhelming management and to avoid giving the impression that All Bases Covered, Inc. is being “shopped” or is “partner happy or desperate.” ÿ As the process continues, the responsibility list should be updated by Business Development to show the current contact status of each active candidate. Implementation: ♦ Successfully completing negotiations is only the first step in creating an effective partnering arrangement. ♦ Once it is clear that a partnering arrangement will be concluded both parties must focus on how the partnering arrangement will be implemented. ♦ To effectively integrate the partnership objectives into operations, continued communications, commitment and execution by all parties is an absolute priority to achieve sustainable success.
Step Four: Contacting The Alliance Partner Targets Corporate vs. Operating Staff ÿ One difficulty in introducing a partnering proposal to an Alliance Partner is that although the Alliance Partner’s operating staff frequently will have the greatest interest in the potential arrangement, it rarely will have the authority to engage in a significant transaction without corporate approval. ÿ Since most Alliance Partners require corporate approval for an equity proposal, All Bases Covered, Inc. may want to first consider a non-equity partnering proposal. ÿ When the operating group in an Alliance Partner cannot complete the partnering arrangement alone, carefully consider how to approach Alliance Partner. ÿ If an Alliance Partner has a corporate business development or strategic development group, Business Development should approach that group first, in the absence of a clear champion. Recruiting a Champion ÿ If not, All Bases Covered, Inc. will probably want to start with or get an introduction to an appropriate person in the operating unit. Such a person can act as the champion within the corporate structure, attesting to the feasibility and value of the technology and the available market. ÿ It is critical that Business Development identify a credible and persuasive champion within an Alliance Partner who has a vested interest in the success of the relationship. Without such a champion, partnering negotiations may eventually stall. ÿ Business Development also should realize that the Alliance Partner corporate staff members who negotiate the partnering arrangement generally will not be responsible for implementing the arrangement.
Confidentiality Agreements ♦ Before attending any meetings with Alliance Partner, Business Development should decide exactly how much technological, business plan or market information ABC is willing to provide to an Alliance Partner without getting a signed confidentiality agreement. ♦ The first information given to an Alliance Partner should be sufficiently general that no confidentiality agreement is necessary. Large companies rarely sign confidentiality agreements before they have concluded that they have some threshold degree of interest in pursuing the opportunity. ♦ Once that level of interest is attained, it is important that Business Development get a signed confidentiality agreement from the Alliance Partner. ♦ Corporate partnering relationships invariably require All Bases Covered, Inc. to relinquish proprietary information. ♦ This is information that All Bases Covered, Inc. will not want an Alliance Partner to use outside the scope of the proposed partnering arrangement. ♦ Business Development should consult with its outside counsel (Barry Carr & Associates) regarding the appropriate form of confidentiality agreement and other mechanisms that can help protect its proprietary information during the partnering process. ♦ In addition to confidentiality, ABC may wish to have an Alliance Partner agree not to solicit All Bases Covered, Inc.’s key employees for some extended period of time. (Currently, two separate corporate NDAs cover these situations.)
Initial Meetings ♦ Business Development can expect at least two or three initial meetings with Alliance Partner staff, over a period of several weeks, to discuss All Bases Covered, Inc.’s objectives, strategy, technology and markets. ♦ Advisors will help All Bases Covered, Inc. develop a comprehensive presentation to be given by All Bases Covered, Inc.’s senior management. ♦ In these initial meetings, Business Development should be prepared to outline briefly what it wants to achieve in the proposed transaction, even though an Alliance Partner generally will not be ready to negotiate or respond to All Bases Covered, Inc.’s proposal at this stage. ♦ It is important, however, to inquire about Alliance Partner’s strategic objectives in order to determine how All Bases Covered, Inc. can modify its proposal to fit the mutual objectives of the two companies.
Step Five: Creating A Proposal ÿ All Bases Covered, Inc. should expect to formulate the partnering proposal. ÿ An Alliance Partner typically will not feel the same degree of urgency as All Bases Covered, Inc. to generate a timely and creative proposal and All Bases Covered, Inc. will want to drive the process. ÿ An Alliance Partner’s staff will help refine the proposal, establish Alliance Partner’s negotiating limits, and will assist in gaining corporate approval. Valuing the Proposal ♦ In formulating the proposal, consider an Alliance Partner’s strategic objectives and try to separate perceived “investment objectives” from “operating objectives.” ♦ An Alliance Partner generates its returns from its operating business. As a result, an Alliance Partner will tend to value the All Bases Covered, Inc. partnering proposal based on an operating discounted cash-flow analysis of the commercial rights that the Alliance Partner will obtain. ♦ To determine Alliance Partner’s cash-flow benefits from these arrangements, it is important to understand the nature of the Alliance Partner decision. ♦ Is this a strategic direction the Alliance Partner cannot achieve without All Bases Covered, Inc., or a “make or buy” decision (i.e., can Alliance Partner accomplish its objectives faster or cheaper through All Bases Covered, Inc. than it can by doing it itself?)? ♦ A careful understanding of Alliance Partner’s alternatives will help All Bases Covered, Inc. interpret Alliance Partner’s discounted cash-flow analysis. Thus, All Bases Covered, Inc. should primarily analyze the partnering proposal in terms of its operating present value returns to Alliance Partner.
Initial Proposals ÿ Initially, proposals should be kept in outline form, leaving the details to be developed in negotiations. Initial proposals must be realistic and businesslike. ÿ Unrealistic expectations or poorly thought out proposals may jeopardize an otherwise promising relationship. ÿ The initial proposal should accomplish the following: • Indicate generally what All Bases Covered, Inc. wants from the transaction, leaving any valuation issues until later; • Define what All Bases Covered, Inc. is prepared to give in the transaction, including deliverables or rights to be granted to the Alliance Partner; • Address and satisfy Alliance Partner’s objectives and concerns; • Prepare for future negotiating trade-offs; and • Set a timetable for completion. ÿ If Alliance Partner indicates an interest in negotiating an arrangement based on the summary proposal, All Bases Covered, Inc. should prepare a detailed version of the proposal, modified to reflect what has been learned to date. ÿ A useful way to prepare for discussions is to complete a matrix similar to the following: ABC Proposal Items Possible Partner Responses ABC Counter Responses 1. 2. 3. 1a. 1b. 1c. 2a. 2b. 2c. 3a. 3b. 3c. 1a. 1b. 1c. 2a. 2b. 2c. 3a. 3b. 3c.
Legal, Tax and Accounting Assistance ÿ Business Development should seek competent legal, tax and accounting input early in the negotiating process, as wells throughout the negotiations and management phases of the relationship. ÿ Not only may legal restrictions make some agreements impossible, but tax implications may make certain legal structures far more costly than others. ÿ In many cases, experienced counsel will know of simpler, safer and more cost- effective mechanisms for accomplishing All Bases Covered, Inc.’s objectives. ÿ When analyzing the issues in the individual building block agreements that make up a partnering arrangement, Business Development and executive management and outside counsel must consider how these issues are affected by the interaction of several of those agreements together.

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Business Development Operations and Procedures

  • 1. Business Development Operations and Procedures Carlos F. Camargo Managing Director Business Development
  • 2. Table of Contents Partnership Strategy and Process Overview for Business Development Step One: Strategic Objectives for Partnering ß Typical Strengths of ABC and its Alliance Partners ß Understanding the Building Blocks of Partnering ß There is no typical partnering arrangement. ß Partnering Building Blocks: 2-way Mapping of Partnership Objectives ß Determining Strategic Needs/Bargaining Chips Step Two: Developing the Partnering Plan ß A typical plan covers the following types of issues: ß Planning for Multiple Partnering Arrangements ß The existence of multiple arrangements adds another layer of complexity. Step Three: Selecting Alliance Partner Targets ß Ideally, each potential candidate should meet the following criteria: ß Designing the Responsibility List ß Implementation Step Four: Contacting the Alliance Partner Targets ß Corporate vs. Operating Staff ß Recruiting a Champion ß Confidentiality Agreements ß Initial Meetings Step Five: Creating A Proposal ß Valuing the Proposal ß Initial Proposals ß Legal, Tax and Accounting Assistance
  • 3. Partnership Strategy and Process Overview for Business Development Step One: Strategic Objectives for Partnering ÿ The first step in the ABC, Inc. partnering process is to identify the strategic reasons for seeking such an arrangement with a like-minded or similarly motivated partner, to pursue the following… • Competitive (re)Positioning • Cost Mitigation • Enhancing Market Reach/Presence/Halo • Funding for channel/distribution development • Funding for marketing/technology development • Quality Improvement • Revenue Enhancement • Securing Equity Investment • Securing Services/Products/Capabilities to fill Whole Product Reqs • Time to Market Efficiencies Threshold for Considering Partnerships: A successful partnering arrangement results when the value each obtains exceeds the costs (current and strategic) incurred in meeting the partnership’s objectives
  • 4. Typical Strengths of All Bases Covered, Inc.s and its Alliance Partners This chart highlights the typical benefits derived by All Bases Covered, Inc. and an Alliance Partner in meeting different functional responsibilities during a product life cycle. Responsibilities All Bases Covered, Inc. Strengths Alliance Partner Strengths Product Development qCreativity Focused development qSpeed qLess developmental bias qFlexibility qBroad market expertise qBroad technical capabilities qBetter lab and test facilities Legal/Regulatory qCutting-edge technology patents qCross-license opportunities qGuidance on regulatory or patent approvals Manufacturing qFaster, low volume capability qPrototyping capability qSpecialized niche manufacturing qComponent purchasing power Tooling and manufacturing qQuality assurance capability Marketing qUnderstanding of niche market qNew technology or new market excitement qCreativity qCompetitive edge qBroad market understanding qEstablished product lines qVolume edge qTrade name recognition Distribution qSpecialized niche distribution qFlexibility qEstablished customer base qEstablished distribution and shelf space qBetter storage and transportation Service/Support qExpertise in new technology problems qEstablished quality standards qWarranty, service and customer support procedures Product Revisions qNext generation capability qBetter product life extension Established user groups
  • 5. Understanding the Building Blocks of Partnering To achieve All Bases Covered, Inc.’s and Alliance Partner’s partnering objectives, All Bases Covered, Inc. and Alliance Partner must mix and match five partnering building blocks to create an agreement that best meets those objectives. Building Blocks of Partnering ABC Dominant Agreements Partner Dominant Agreements q Development: All Bases Covered, Inc.’s funds development of Alliance Partner’s specific technology or products in return for rights to the resulting technology or products. q Development: Alliance Partner funds All Bases Covered, Inc.’s development of specific technology or products in return for rights to the resulting technology or products. q Distribution: All Bases Covered, Inc. receives the right (exclusive or non-exclusive) to distribute Alliance Partner’s products/services within a particular geographic territory or vertical market. q Distribution: Alliance Partner receives the right to distribute All Bases Covered, Inc.’s products/services within a particular geographic territory or vertical market. q Equity: All Bases Covered, Inc. purchases an equity stake (usually a minority position) in Alliance Partner in return for either a seat on Alliance Partner’s Board of Directors or contractual rights to Alliance Partner’s technology or marketing/distribution/channels. Equity purchases may be supplemented or replaced by options to Alliance Partner stock, loans to Alliance Partner. or an option or warrant to acquire Alliance Partner q Equity: Alliance Partner purchases an equity stake (usually a minority position) in All Bases Covered, Inc. in return for either a seat on All Bases Covered, Inc.’s Board of Directors or contractual rights to All Bases Covered, Inc.’s technology/marketing/distribution/channel. Equity purchases may be supplemented or replaced by options to purchase All Bases Covered, Inc. stock, loans to All Bases Covered, Inc. or an option to acquire ABC. q Licensing: All Bases Covered, Inc receives the q Licensing: Alliance Partner receives the right to
  • 6. Building Blocks of Partnering ABC Dominant Agreements Partner Dominant Agreements right to use and modify. Alliance Partner’s technology/product/service within a particular geographic territory or vertical market in a broader way than a manufacturing or distribution grant (e.g., OEM agreements or internal use licenses). Licenses All Bases Covered, Inc more information about the technology and typically bear royalties. use and modify All Bases Covered, Inc.’s technology/product/service within a particular geographic territory or vertical market in a broader way than a manufacturing or distribution grant (e.g., OEM agreements or internal use licenses). Licenses give Alliance Partner more information about the technology and typically bear royalties. q Manufacturing: All Bases Covered, Inc. receives the right to manufacture products using Alliance Partner’s technology. q Manufacturing: Alliance Partner receives the right to manufacture products using All Bases Covered, Inc.’s technology. There is no typical partnering arrangement. ♦ Each partnering arrangement is a hybrid of some or all of these building blocks and can be formed during or after the development of the technology/service or product. ♦ Since strategic objectives of individual companies differ, All Bases Covered, Inc. may find that seemingly similar Alliance Partners may be interested in partnering arrangements with very different structures. ♦ To determine which of these building blocks is appropriate, it is important to understand what advantages All Bases Covered, Inc. and Alliance Partner might see in any particular building block.
  • 7. Partnering Building Blocks: 2-way Mapping of Partnership Objectives Building Block All Bases Covered, Inc. Objectives Alliance Partner Objectives Equity Investment ÿ Capital infusion ÿ Enhance All Bases Covered, Inc.’s market credibility ÿ Strengthen other relationships with Alliance Partner ÿ Access to Alliance Partner’s operating and market expertise ÿ Precursor to Alliance Partner’s acquisition of All Bases Covered, Inc. ÿ Window on All Bases Covered, Inc.’s service/product or market ÿ Influence on All Bases Covered, Inc.’s strategic direction ÿ Strengthen other relationships with All Bases Covered, Inc. ÿ Block competitors from obtaining access to All Bases Covered, Inc.’s technology ÿ Precursor to acquisition of All Bases Covered, Inc. Technology Development Agreement ÿ Access to Alliance Partner’s technology and patents ÿ Funding for All Bases Covered, Inc.’s own R&D program ÿ Access to Alliance Partner’s test and regulatory approval capabilities ÿ Access to All Bases Covered, Inc.’s service/product and patents ÿ Basis for obtaining manufacturing, distribution or licensing rights ÿ Access to All Bases Covered, Inc.’s faster, cheaper and more flexible development capabilities Manufacturing Agreement ÿ Avoid capital expense of building own plant ÿ Ship product more rapidly ÿ Obtain Alliance Partner’s quality and test capability ÿ Use excess manufacturing capacity ÿ Broaden manufacturing capability into new area ÿ Ensure quality of product to be acquired Distribution Agreement ÿ Arrive at specialized vertical or geographic market faster ÿ Get benefit of Alliance Partner’s market reputation and support capacity ÿ Complement and broaden current product line; diversify into new markets ÿ Control sales and service process Licensing Agreement ÿ Royalties from markets that All Bases Covered, Inc. would not otherwise address ÿ Gain access to Alliance Partner’s technology and patents ÿ Gain manufacturing and distribution capability ÿ Incorporate All Bases Covered, Inc.’s service/product into Alliance Partner’s products ÿ Right to change All Bases Covered, Inc.’s service/product itself ÿ Right to use All Bases Covered, Inc.’s service/product in other parts of its operations
  • 8. Determining Strategic Needs/Bargaining Chips ♦ Once All Bases Covered, Inc.’s objectives and the likely objectives of a prospective partner have been analyzed, the next step is to list ABC’s strategic needs and likely bargaining chips. ÿ “Strategic needs” are those items of strategic value that All Bases Covered, Inc. wants to obtain. ÿ “Bargaining chips” are those items of strategic value that All Bases Covered, Inc. can offer to a potential partner. ♦ Initially, these lists should be as comprehensive as possible. Once the process of selecting specific partnering candidates begins, the lists should be pared down to those items applicable to a given potential partner. ÿ To illustrate, All Bases Covered, Inc.’s strategic needs and bargaining chips lists might look like the following: ABC’s Strategic Needs ABC’s Bargaining Chips ÿ Approximately $5 million in capital, revenues or reduced expenses; ÿ Existing proprietary products, technology or patents; ÿ Distribution capability, particularly overseas or in a defined vertical market; ÿ R&D capability to create a unique product or component meeting Alliance Partner’s specifications; ÿ Customer leads, credibility; ÿ “Influence” on All Bases Covered, Inc.’s future direction, reflected by a Alliance Partner seat on All Bases Covered, Inc.’s Board of Directors or R&D Committee; ÿ domestic manufacturing capability for private label whitebox initiative; ÿ Product manufacturing/assembly capability in the United States; ÿ Related product lines, particularly those that create an opportunity for All Bases Covered, Inc. system sales; ÿ Vertical distribution capability in defined areas or markets; and ÿ Additional technology to incorporate into current or planned products; and ÿ Intangibles, such as the ability to move quickly, market focus, customer awareness, image and reputation in market niche, productivity and trend setting ability. ÿ Sourcing of certain parts or raw materials. ÿ Niche market brand, presence, coverage, or reach
  • 9. Step Two: Developing The Partnering Plan ÿ Having determined the strategic needs and the current capabilities of All Bases Covered, Inc., the next step is to create a partnering plan. ÿ The key managers of All Bases Covered, Inc. must be actively involved in creating an effective plan. Polling via email or phone at a minimum is both a professional courtesy and invaluable decision-making and –sharpening tool. ÿ The resultant plan will help focus the advisors and management team as All Bases Covered, Inc. goes through the partnering process. A typical plan covers the following types of issues: 1. Strategic, operating and financial objectives that support All Bases Covered, Inc.’s strategy for increasing market share; 2. Strategy for developing the partnering process; 3. Proposed deal structures, including likely alternatives, implications and negotiating limits; 4. Anticipated, realistic timetable; 5. Materials to be furnished to the potential partner: the first information pack to spark interest in All Bases Covered, Inc. and a second set to provide adequate disclosure for Alliance Partner’s initial decision regarding degree of interest; and 6. Target list of partnering candidates by types, with brief reasoning and priorities.
  • 10. Planning for Multiple Partnering Arrangements ÿ Partnering arrangements are inherently more complex than a “straight” venture financing, acquisition, R&D contract, or manufacturing, distribution or licensing arrangement taken alone. ÿ For a successful partnering arrangement, All Bases Covered, Inc. must meet the strategic objectives of an Alliance Partner and provide an Alliance Partner with (sometimes) substantial rights to All Bases Covered, Inc.’s product/service/technology and market. Monitoring and management are key to continued good relations. ÿ At the same time, All Bases Covered, Inc. must ensure that it does not give away a disproportionate part of its product/service/technology and market to an Alliance Partner in exchange for a minority equity investment or R&D contract. ÿ When making concessions to an Alliance Partner, All Bases Covered, Inc. must consider that it will want to do other partnering arrangements in the future. The existence of multiple arrangements adds another layer of complexity. ÿ It is often helpful to negotiate with two prospective Alliance Partners simultaneously, so as to have an alternative when negotiations get difficult. ÿ When partnering arrangements occur in sequence, All Bases Covered, Inc. should use previous arrangements as a baseline for later negotiations. ÿ A long-term, exclusive grant of rights in one partnering arrangement may limit All Bases Covered, Inc.’s flexibility in creating later relationships unless each agreement is carefully structured to fit into All Bases Covered, Inc.’s strategic plan.
  • 11. Step Three: Selecting Alliance Partner Targets ÿ One of the most critical issues in the partnering process is determining which companies to approach. ÿ Enormous amounts of time and resources can be wasted with inappropriate candidates that are not likely to meet All Bases Covered, Inc.’s strategic needs. Ideally, each potential candidate should meet the following criteria: • Ability to meet All Bases Covered, Inc.’s strategic objectives; • Strategic objectives that All Bases Covered, Inc. can meet without having Alliance Partner dominate All Bases Covered, Inc.’s business; • Clear need for All Bases Covered, Inc.’s bargaining chips at the operating (not just the corporate) level; • Distinct and non-conflicting target markets; • Familiarity with All Bases Covered, Inc.’s services, technologies, products and markets; • Interest, or successful experience in making similar deals; • No recent major change in identity or organization; • Compatible people and corporate cultures; and • Ability to complete the transaction within the required timeframe. It is difficult to obtain this type of information about potential partners and no one partner will meet all these criteria. Still, gathering this type of information and using it to prioritize the list of candidates will both reduce the amount of time spent with inappropriate candidates and increase the likelihood of success.
  • 12. Designing the Responsibility List ÿ Once the list of prospective candidates has been prioritized, Business Development or specific members of the management team or Board of Directors, should be assigned the responsibility of contacting one or more of the top-priority targets. ÿ Ideally, the assigned person should have a personal contact within the target Alliance Partner who is already familiar with All Bases Covered, Inc. or willing to learn more. ÿ Only contact a few companies at a time, both to avoid overwhelming management and to avoid giving the impression that All Bases Covered, Inc. is being “shopped” or is “partner happy or desperate.” ÿ As the process continues, the responsibility list should be updated by Business Development to show the current contact status of each active candidate. Implementation: ♦ Successfully completing negotiations is only the first step in creating an effective partnering arrangement. ♦ Once it is clear that a partnering arrangement will be concluded both parties must focus on how the partnering arrangement will be implemented. ♦ To effectively integrate the partnership objectives into operations, continued communications, commitment and execution by all parties is an absolute priority to achieve sustainable success.
  • 13. Step Four: Contacting The Alliance Partner Targets Corporate vs. Operating Staff ÿ One difficulty in introducing a partnering proposal to an Alliance Partner is that although the Alliance Partner’s operating staff frequently will have the greatest interest in the potential arrangement, it rarely will have the authority to engage in a significant transaction without corporate approval. ÿ Since most Alliance Partners require corporate approval for an equity proposal, All Bases Covered, Inc. may want to first consider a non-equity partnering proposal. ÿ When the operating group in an Alliance Partner cannot complete the partnering arrangement alone, carefully consider how to approach Alliance Partner. ÿ If an Alliance Partner has a corporate business development or strategic development group, Business Development should approach that group first, in the absence of a clear champion. Recruiting a Champion ÿ If not, All Bases Covered, Inc. will probably want to start with or get an introduction to an appropriate person in the operating unit. Such a person can act as the champion within the corporate structure, attesting to the feasibility and value of the technology and the available market. ÿ It is critical that Business Development identify a credible and persuasive champion within an Alliance Partner who has a vested interest in the success of the relationship. Without such a champion, partnering negotiations may eventually stall. ÿ Business Development also should realize that the Alliance Partner corporate staff members who negotiate the partnering arrangement generally will not be responsible for implementing the arrangement.
  • 14. Confidentiality Agreements ♦ Before attending any meetings with Alliance Partner, Business Development should decide exactly how much technological, business plan or market information ABC is willing to provide to an Alliance Partner without getting a signed confidentiality agreement. ♦ The first information given to an Alliance Partner should be sufficiently general that no confidentiality agreement is necessary. Large companies rarely sign confidentiality agreements before they have concluded that they have some threshold degree of interest in pursuing the opportunity. ♦ Once that level of interest is attained, it is important that Business Development get a signed confidentiality agreement from the Alliance Partner. ♦ Corporate partnering relationships invariably require All Bases Covered, Inc. to relinquish proprietary information. ♦ This is information that All Bases Covered, Inc. will not want an Alliance Partner to use outside the scope of the proposed partnering arrangement. ♦ Business Development should consult with its outside counsel (Barry Carr & Associates) regarding the appropriate form of confidentiality agreement and other mechanisms that can help protect its proprietary information during the partnering process. ♦ In addition to confidentiality, ABC may wish to have an Alliance Partner agree not to solicit All Bases Covered, Inc.’s key employees for some extended period of time. (Currently, two separate corporate NDAs cover these situations.)
  • 15. Initial Meetings ♦ Business Development can expect at least two or three initial meetings with Alliance Partner staff, over a period of several weeks, to discuss All Bases Covered, Inc.’s objectives, strategy, technology and markets. ♦ Advisors will help All Bases Covered, Inc. develop a comprehensive presentation to be given by All Bases Covered, Inc.’s senior management. ♦ In these initial meetings, Business Development should be prepared to outline briefly what it wants to achieve in the proposed transaction, even though an Alliance Partner generally will not be ready to negotiate or respond to All Bases Covered, Inc.’s proposal at this stage. ♦ It is important, however, to inquire about Alliance Partner’s strategic objectives in order to determine how All Bases Covered, Inc. can modify its proposal to fit the mutual objectives of the two companies.
  • 16. Step Five: Creating A Proposal ÿ All Bases Covered, Inc. should expect to formulate the partnering proposal. ÿ An Alliance Partner typically will not feel the same degree of urgency as All Bases Covered, Inc. to generate a timely and creative proposal and All Bases Covered, Inc. will want to drive the process. ÿ An Alliance Partner’s staff will help refine the proposal, establish Alliance Partner’s negotiating limits, and will assist in gaining corporate approval. Valuing the Proposal ♦ In formulating the proposal, consider an Alliance Partner’s strategic objectives and try to separate perceived “investment objectives” from “operating objectives.” ♦ An Alliance Partner generates its returns from its operating business. As a result, an Alliance Partner will tend to value the All Bases Covered, Inc. partnering proposal based on an operating discounted cash-flow analysis of the commercial rights that the Alliance Partner will obtain. ♦ To determine Alliance Partner’s cash-flow benefits from these arrangements, it is important to understand the nature of the Alliance Partner decision. ♦ Is this a strategic direction the Alliance Partner cannot achieve without All Bases Covered, Inc., or a “make or buy” decision (i.e., can Alliance Partner accomplish its objectives faster or cheaper through All Bases Covered, Inc. than it can by doing it itself?)? ♦ A careful understanding of Alliance Partner’s alternatives will help All Bases Covered, Inc. interpret Alliance Partner’s discounted cash-flow analysis. Thus, All Bases Covered, Inc. should primarily analyze the partnering proposal in terms of its operating present value returns to Alliance Partner.
  • 17. Initial Proposals ÿ Initially, proposals should be kept in outline form, leaving the details to be developed in negotiations. Initial proposals must be realistic and businesslike. ÿ Unrealistic expectations or poorly thought out proposals may jeopardize an otherwise promising relationship. ÿ The initial proposal should accomplish the following: • Indicate generally what All Bases Covered, Inc. wants from the transaction, leaving any valuation issues until later; • Define what All Bases Covered, Inc. is prepared to give in the transaction, including deliverables or rights to be granted to the Alliance Partner; • Address and satisfy Alliance Partner’s objectives and concerns; • Prepare for future negotiating trade-offs; and • Set a timetable for completion. ÿ If Alliance Partner indicates an interest in negotiating an arrangement based on the summary proposal, All Bases Covered, Inc. should prepare a detailed version of the proposal, modified to reflect what has been learned to date. ÿ A useful way to prepare for discussions is to complete a matrix similar to the following: ABC Proposal Items Possible Partner Responses ABC Counter Responses 1. 2. 3. 1a. 1b. 1c. 2a. 2b. 2c. 3a. 3b. 3c. 1a. 1b. 1c. 2a. 2b. 2c. 3a. 3b. 3c.
  • 18. Legal, Tax and Accounting Assistance ÿ Business Development should seek competent legal, tax and accounting input early in the negotiating process, as wells throughout the negotiations and management phases of the relationship. ÿ Not only may legal restrictions make some agreements impossible, but tax implications may make certain legal structures far more costly than others. ÿ In many cases, experienced counsel will know of simpler, safer and more cost- effective mechanisms for accomplishing All Bases Covered, Inc.’s objectives. ÿ When analyzing the issues in the individual building block agreements that make up a partnering arrangement, Business Development and executive management and outside counsel must consider how these issues are affected by the interaction of several of those agreements together.