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Operations Cooperatives – Do They Work?

Have you ever considered joining together for operational functions with your competitors?

At first blush, a co-op makes sense. For instance, in an area presently populated with four competitors, why have four accounting departments when you could have just one? This one office could do the accounting for all four companies!

The idea makes intuitive sense — one company to perform accounting, order taking, and dispatching for all four competitors. Logically, there would be economic benefit to such a consolidation through economies of scale.

A critical problem with this thinking, however, is the issue of price and margins, and trying to stay out of anti-trust problems. If one objective of the co-op is to combine billing functions, then at least one person will have access to pricing and margin information for all the competitor companies. This is a legal issue that needs to be addressed with a petroleum specialty legal firm. (We suggest Al Alfano at 202-466-6502.)

On a second, harder look at co-ops, however, there is one question that begs to be asked – “Why don’t these companies merge?” If the owners can envision getting along well enough to form a cooperative centralized operations office, why don’t they just legally combine their entire companies?

Complicated or inequitable real estate — Often the reason given not to merge is real estate related. Combining operations, however, does not mean combining real estate. Real estate may still be held in individual name. Particularly if there are contamination issues, holding real properties outside any merged entity is advantageous.

Concern for children – Mergers can be precluded by estate planning. If an owner wants to leave his business to his heirs, he may feel merger dilutes ownership. However, remember that if the merged entity experiences success, the future generation’s small piece of the larger merged pie may have greater value than the whole pie of the original company. A good attorney can bring entities together with succession and “what if” clauses that will meet the need of current and future generations amicably.

Ego – Without stating the blatantly obvious, it’s ego more than real estate or succession issues that keep competitor companies from merging. Bring four owners together who are accustomed to running their own show, and then tell them they have to agree and share power, and suddenly merger becomes less attractive. Truth be known, it’s the desire for control and fear of relinquishment of control that stands in the way of otherwise financially logical mergers.

The bottom-line is that if it is economical to combine operations functions, it is even more economical to merge. An outside board of directors plus an outside consultant specializing in transition management can be a blessing to address difficult merger issues. If you are considering merging with competitors, we suggest you contact Don Babb at Don is expert at blending egos, thereby creating successful transitions.

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