Joint Venture 101: Grow Your Business with a Joint Venture
The following is an exclusive excerpt from Happy About Joint Venturing by Valerie Orsoni-Vauthey. The book shows entrepreneurs how to start and grow successful joint ventures and how to avoid pitfalls:
If you can't beat 'em, join 'em. Two heads are better than one. United we stand.
If you are a business owner who wants to significantly increase market reach, break down barriers to entry in your market, or simply generate skyrocketing revenues in a shorter amount of time, these old adages are becoming more and more relevant.
According to the Commonwealth Alliance Program (CAP), businesses anticipate strategic alliances accounted for 25% of all revenues in 2005, a total of 40 trillion dollars. This figure has been steadily growing over the past few years as more Work At Home Parents (WAHPs) decide to unite to augment their odds of survival in a highly competitive global environment.
You are about to learn one of the most powerful tools for being successful in today's competitive business atmosphere. I'm of course talking about Joint Ventures, or specifically, teaming up with another person, group of persons, or business entity for the purpose of expanding your business influence and creating a more powerful market presence.
Joint Ventures are in, and if you're not utilizing this strategic weapon, chances are your competition is, or will soon be, using this to their advantage ... possibly against you!
Our primary goal is to make you a successful joint venturer. This will happen if you are an informed entrepreneur. Thus, it is necessary for us to dive into the technical aspects of joint ventures. Specifically:
- What is a joint venture?
- How does it work?
- Should I start a joint venture?
- What are my chances of success?
- What are the risks involved?
- What are the legal implications of a joint venture?
A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits.
A joint venture differs from a merger in the sense that there is no transfer of ownership in the deal.
This partnership can happen between goliaths in an industry. Cingular, for instance, is a strategic alliance between SBS and Bellsouth. It can also occur between two small businesses that believe partnering will help them successfully fight their bigger competitors.
Companies with identical products and services can also join forces to penetrate markets they wouldn't or couldn't consider without investing tremendous resources. Furthermore, due to local regulations, some markets can only be penetrated via joint venturing with a local business.
In some cases, a large company can decide to form a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain, even with plenty of cash at their disposal.
How Joint Ventures Work
The process of partnering is a well-known, time-tested principle.
The critical aspect of a joint venture does not lie in the process itself, but rather in its execution. We all know what needs to be done: specifically, it is necessary to join forces. However, it is easy to overlook the "hows" and "whats" in the excitement of the moment with this new partnership.
We will look at the "hows" in our review of the critical factors of success. For the moment, let's keep in mind that all mergers, large or small, need to be planned in detail and executed following a strict plan in order to keep all the chances of success on your side.
The "whats" should be covered in a legal agreement that will carefully list which party brings which assets (tangible and intangible) to the joint venture, as well as the objective of this strategic alliance. Although joint venture legal agreement templates can readily be found on the Internet, we suggest you seek the appropriate legal advice when entering such a business relationship.
Starting a Joint Venture
There is no straight answer to this question. The decision involves addressing various elements. Consider copying the following questions on a word processing document, so that you can constantly address and answer those important elements before and as you move forward.
Important questions to consider:
- What do I sell, and how do I reach my target market?
- Who are my competitors? If they are better at generating revenues and reaching the marketplace than me, what do they have that I don't?
- Are there geographical areas that will remain beyond reach without local partners, or acquisition costs that are simply too high?
- Do I need to develop know-how which has already been developed by a company or by an individual?
- Is there a logical business partner that could help me develop a vertical or horizontal market penetration?
- Do I have all the human resources I need in marketing, R&D, production, or operations? Is there a company I know which would have resources complementary to mine?
- How do I feel about combining resources? Do I like to lead by myself and act as a solitary business hero, or am I fine with sharing the pie? Do I think it is better to own 20% of a $200 million company or 100% of a $1 million small business?
- Do I have access to the right legal resources to structure the joint venture and ensure all aspects are duly covered?
- Are there local legal regulations I can bypass by partnering with a local business?
- Do I have access to successful joint venturers who can share their experience with me?
- Do I understand that going through the decision process entails sitting down and taking the time to write a full-fledged joint business plan?
- Am I aware that in the vast majority of cases, merging activities, even when not necessarily identical, will result in an inevitable workforce reduction? How do I feel about letting go of some of my most faithful employees?
- Am I looking at partnering because I don't see another way out of my current business problems? (Joint venturing should not be considered as a last resort action, but rather as one course of action among several others. This decision needs to be taken in a careful and methodical manner.)
- Do I already know of a person or a company that I see has a real interest in partnering? Have I discussed this possibility with this person or with the person in charge of the targeted company? If yes, what is the general feeling? If no, then it is time to start a high-level discussion to gauge the level of interest.
- Is my company in need of more credibility? Do I know of a potential joint venture target, which has the level of credibility I am seeking?
- What are my strengths and weaknesses? What are the threats and opportunities in my target market?
- Do I have all the support I need to go through this major change in my business life? If I am going through personal turbulences, does it make sense to start such a major project?
Chances of Success
Although there are no official statistics on the rate of success of specific strategic alliances, like joint ventures, per se, a few studies have, however, been conducted in this field. Their main findings were that most joint ventures fail about 60% of the time within five years.
Experts agree that the key to success is the human factor, such as human resources integration and knowledge sharing, rather than geographical or financial factors.
Keep in mind that joint venturing in third world countries entails a higher rate of failure. Lack of local legal knowledge, communication problems, divergence on agreed-upon objectives, differing deadline perceptions, etc., all contribute to this elevated rate.
How do we measure the performance of a joint venture? There are several formulas that can be used. It depends on the strategic alliance in the first place. Do you wish to:
- Increase profits?
- Share R&D expenses?
- Extend or maintain market position?
- Improve distribution channels?
- Reduce overall costs/economies of scale?
- Develop new technology?
- Diversify product offerings?
- Reduce competition?
- Spread risk (mainly on large investments)?
Some of those goals are easily translated into financial figures like "percentage of increased profits," "who incurs which expenses," and "increased product offerings." For example, if you were planning to increase your profits by 20%, you just need to compare your achievements with your previous situation, and you will know with certainty how well your joint venture performed.
Though some objectives are hard to quantify, like "reducing competition," for instance, methods are always available to analyze how well a joint venture's plan was executed. One could argue that if competition is cut down, then profits should increase.
If reducing competition has the sole objective of stabilizing or reversing a slowing revenue growth, it is easy to demonstrate the positive impact a strategic alliance could have on such a goal.
Remember, the key determining element responsible for joint venture failures is the human factor. Being able to make your employees feel comfortable about a potentially disturbing strategic alliance will be crucial to your success. This implies that not only must both sides understand how much they have to gain from this joint venture, but more importantly, how much they can lose by not partnering.
Information sharing will be vital, and it is essential that as early as possible, both teams talk and exchange their knowledge. This entails meetings, steering committees, joint company events, employee "swaps" and internal promotions.
Going back to our primary question: what are my chances for success? We know that on average, only about 40% of joint ventures are successful within five years. Since this figure includes partnerships with underdeveloped countries; which have a high rate of failure, we can reasonably state that if you join forces with a company located in a developed area and have done your homework, your probability of success should be closer to 80%.
Since strategic alliances are built on trust and convergent goals, one of the main risks you can face may occur if the partners are from different cultures. They may not trust operating a certain "way" or have divergent goals. Even with similar strategic goals, two partners who lack trust in each other may lack the willingness to reciprocate. When joint venturing, be prepared to give and take.
This sharing principle should govern the entire process. Many potential joint ventures, including large-scale projects, have died before the ink on the contract was dry, because of divergent goals and self-serving attitudes, which are not in sync with the essence of the joint venture. One example of this was the British Aerospace/Taiwan Aerospace alliance. After tough negotiations, the two parties signed an agreement during a celebrated ceremony in Taiwan. Soon after, Taiwan announced its wish to pull out of the deal. Why? Because their goals were divergent. Taiwan wanted to acquire new technology, which the British refused to give away, and the British wanted to capture new markets in Asia, which Taiwan refused to grant.
A joint venture concept is only effective when there is a true willingness to move forward together. Not even signed contracts have value if mutual trust and acceptance of the terms are not present. It is actually better not to consider a joint venture project if motives from either side are questioned by the other side. A graceful exit before any legal obligation takes effect will most likely prevent an inevitable failure. The risks involved are therefore simple to evaluate. You can:
- Waste your time
- Lose money
- Let go of important technology
- Gain nothing of significance in return
- Squander your credibility
Even though these and other risks in joint ventures are present, the rewards can far outweigh pitfalls. It is important to completely evaluate your risks, and do your homework before and during the process.
Legal Implications of a Joint Venture
The geographical locations of the partners and target markets involved will dictate the degree of legal complexity when joint venturing.
If you both operate in the United States, you will need to sign at least one document: a joint venture agreement. Due to the rapid evolution of legislation, seek the proper legal advice, rather than using a pre-made template that is readily found on the Internet or in books.
If one of the partners is not located in the United States, or if both parties are foreign, additional documents will need to be signed: specifically, a New Legal Entity and a Joint Venture Agreement. In some countries where local market access is restricted, you will have to go through a local "Validation" of your privileges and of the status of your joint venture.
Again, there are always legal variances depending on the goals and scope of your joint venture. Owning a business can be one of the most exciting times in one's career. If done correctly, it can create the dream life you have always wanted. Depending on what you want from your business and how fast you want to get there, joining forces to create a more powerful presence in your market may be an attractive option.