All businesses need to use whatever tools give them an advantage, particularly during hard and challenging periods. One such tool that is increasingly being utilised is the joint venture which give the partners strategic and practical advantages.
What is a Joint Venture?
The term Joint Venture refers to a strategic alliance or a teaming up with another party, or several parties, to form a partnership. The sole purpose of a joint venture is to expand and strengthen the businesses of all the individuals or entities involved.
The partners in a joint venture agree to share their markets, knowledge, assets including intellectual property, and their profits. What makes a joint venture different from a merger is that there is no transfer or change of ownership. In other words, your business remains yours, but it is part of the shared venture.
Joint ventures are a powerful tool for businesses regardless of their size. However, they can be especially useful for smaller enterprises as they give them a greater chance to compete with larger competitors. Large businesses sometimes utilise joint ventures to acquire the technology or intellectual property of a smaller business.
Forming alliances with companies outside your area of operation who offer the same products or services can provide you with local knowledge that you would either not have or that it would take time and resources to acquire. This can also be a useful way to work within local regulations.
Questions to ask yourself before pursuing a Joint Venture
Before you decide being part of a joint venture is for you and your business you need to ask yourself some questions and supply accurate and honest answers. Write these questions and your responses down and refer to and alter them when you need to.
- Who is my customer / target market?
- What do I provide to my customers? What is my service or product range?
- How do I access my target market? What sales and marketing channels do I use?
- Am I and my business adequately protected from risk including public-liability? If not, you need to invest in protection as soon as possible. Companies like BizCover can give you quick online comparisons and quotes, click here.
- Who are my competitors?
- What does the competition do or have that I do not?
- Do I have skill or knowledge gaps in my business I need to fill?
- Does my business have the staff it needs, or could another company’s employees compliment mine?
- What are my strengths and weaknesses?
- What threats does my business face?
- How robust and strong is my business currently? Embarking on a joint venture when things are difficult may be unwise.
- Am I considering a joint venture only because my business is struggling? That is not a good reason for anybody involved.
- Does my business have credibility and a good reputation?
- Are there businesses / potential partners that could enhance my reputation and credibility?
- Are there geographical areas I cannot access due to practical or legislative restrictions? Would partnering with a business in those inaccessible areas solve the problem?
- Do I know of someone who is currently part of a successful joint venture who would be willing to discuss the issue with me?
- Do I have potential partners in mind? If so who and will they be open to discussions about establishing a joint venture?
In addition to these questions, you also need to ask if you are willing to:
- Take the time to negotiate, discuss, and draw up the required detailed business plan?
- Combine resources and share income?
- Change from having 100% of my business to having a share of a joint venture?
- Let some of my staff go if the structure of the joint venture makes this necessary?
These questions and answers will help you decide whether to the consideration of forming part of a joint venture any further.
How do Joint Ventures work?
The process of forming a joint venture or partnership can be exciting, and it is easy to get carried away with enthusiasm. However, it is crucial that you and your partners-to-be get the what and the how clearly defined and stated. Without a detailed plan that is correctly executed a joint venture can be in trouble before it even starts.
Many of these issues and specifications are usually dealt with in the legal contract between the partners in the joint venture. They include:
- What each party will contribute in terms of tangible assets (equipment or products, for example) or intangible assets such as services or knowledge / information
- What the objective and scope of the partnership are
While you could use one of the templates or standard Joint Venture Agreements available online, obtaining legal advice and assistance with drawing up a contract is preferable.
How successful are Joint Ventures?
There are no studies that have examined joint ventures specifically. However, 60% of strategic alliances fail within the first five years. It should be noted that joint ventures between first and third world countries have the highest failure rate. This skews the overall figure result in the high percentage. Considering this, some believe that joint ventures enjoy an 80% success rate.
The reasons for the failure of many joint ventures do not appear to be either financial or geographical but rather human. There appear to be problems in the areas of human resources and the sharing of information.
It is easier to assess and measure how successful a joint venture is. Ask whether it is meeting the objectives you and your partners set at the outset? These objectives could include some or all of the following:
- Increased profits
- Increased market share
- Expanded market and improved distribution
- Shared expenses
- New and more diverse products, services, or technologies developed
- Less competition
- Reduction of costs
- Spread investment and other risk.
If you can answer yes then your joint venture is working. Of course, some of these are far easier to measure than others. For instance, you can compare current profits and expenses with previous figures but it is harder to quantify a how much competition there is.
What are the risks associated with Joint Ventures?
There are several risks you need to avoid:
- Lack of convergence and trust: Strategic partnerships, including joint ventures, are built on convergent objectives and mutual trust. Without a desire to move towards each other and then progress together and the ability to trust our partners a joint venture is doomed to fail.
- Unwillingness to share: Partners must be willing to share resources and information. If they are not and are only acting in their own interests the alliance will not succeed.
- Lack of commitment to working together: A joint venture begins after the contract or agreement is signed. If the partners are not able or willing to move forward together the joint venture will be over before it begins.
A failed joint venture is costly. The partners will have lost money and credibility, wasted a great deal of time and energy and potentially lost staff, technology or information. In addition, there are unlikely to be any gains at all.
What are the legal implications of a Joint Venture?
Some Joint Venture Contracts are relatively straightforward and this agreement is all that the partners are required to sign. Things become more complex if different geographical locations are involved. Additional documents may be required to comply with local legal requirements.
Where to now?
You have assessed your business and the value of a joint venture for you and decided it is the right course of action. You have also identified and met with your partners. If you have staff, there is a crucial step you need to take: talk to them.
A joint venture will cause major changes for everybody at all the businesses involved in the new partnership. This can be frightening or even demotivating. You need to have open and honest discussions, so everybody knows what the situation is and how they are likely to be affected.
You also need to ‘sell’ the joint venture by showing your team what the advantages will be – or what the losses will be from not forming the joint venture – so you can turn negative emotions or expectations into positive ones.
Your partners should do this with their staff too and, when the time is right, staff swops and joint meetings can take place. All the businesses must be able to keep their times on side and communication open.