Various studies over the years have identified that businesses enter into joint ventures for three key reasons; to pool resources, establish new markets or as an alternative to a more formal merger or acquisition.
Unfortunately, the data from these studies suggests that almost half of the joint ventures that are entered into fail to add value for the joint venture partners.
Given this, I thought I’d highlight 5 key ways to maximise your chance of creating value in a joint venture.
Ensure you want the same things
Joint venture partners need to be clear on why each of them are entering a joint venture and what they want from it. There should be alignment. You should start by working through your respective imperatives at a high level before committing resources and people to develop a detailed business plan for the joint venture. By working through the vision, mission and values for the joint venture, agreeing product/market fits, employee requirements, marketing and sales strategies, funding needs and addressing the partners’ response to the likely commercial issues that will arise, the joint venturers ensure that any lack of alignment should show up before they’ve committed pen to paper.
Communicate clearly and align your staff
Once the joint ventures partners have agreed their alignment it is critical that the agreed position is clearly and regularly communicated to the staff that will be charged with implementing the joint venture. Not only do those staff need to understand the agreed position but they need to be aligned to perform to the strategy set by the joint venture partners. This can be achieved by appropriate employment contracts and KPI based incentive arrangements. Perhaps of most critical importance though is ensuring that the performance and values of the joint venture staff align to that of the joint venture. This can be especially difficult where the underlying culture of the two joint venture partners is different.
Develop an appropriate governance structure
A governance framework doesn’t guarantee that every decision made in a joint venture will be a good one but it does ensure that operations are consistent with the originally agreed aligned strategy. Recognising an appropriate balance between, on the one hand, ensuring that operational decision making can happen quickly and without undue process and, on the other, protecting the value of a joint venturer’s investment in the joint venture is critical. If the appropriate delegations between the joint venture’s executive management, board and shareholders are not set carefully you can stifle innovation and slow down the business.
Be clear on who is contributing what, when and on what terms
The nature of a joint venture is that the parties are generally bringing something of value to the arrangement. Sometimes that is simply cash. Other times the obligations are to contribute assets or services for the good of the joint venture. We see too many joint ventures where the commercial terms on which a partner contributes to the joint venture undermines the basis of a collaboration for a common good.
Write it down!
Some people say the best joint venture agreements are written, signed and filed never to be read again. That may be the case but if something does go wrong in the joint venture relationship, having a well prepared agreement that provides a framework for unwinding the arrangements will save a lot of heartache. The joint venture agreement should cover things like the economic entitlements of the parties, reporting obligations, decision making processes and exits (including through drag along or tag along mechanisms).
If you’d like to find out more about building value in a joint venture, please contact Gerry Cawson.