Many business owners face opportunities and challenges as they look to grow and expand their businesses. This growth may be accomplished through a merger or acquisition of a business or through organic growth, either in the company’s existing market or expansion into a new market. In some cases, forming a joint venture (JV) with a strategic partner may be a good option.
Why form a JV?
- Companies have a variety of motives, including:
- Gaining access to a new market
- Reducing or sharing cost
- Mitigating up-front and operational risks
- Gaining access to additional resources and/or different core competencies
- Preserving cash and/ or gaining additional financial resources
When a company determines the formation of a JV is an appropriate strategy to accomplish a goal for the business, it becomes critical to ensure that the JV is on a path to success. Businesses enter JV arrangements with the 4 Keys to successful Joint Ventures intention of meeting or exceeding their targeted objectives; however, many fail to meet those goals. Typically, these failures are a result of poor planning and a lack of commitment of sufficient resources during the launch phase of the joint venture.
So how do you position your JV for success? Here are four key elements to consider:
- Set clear goals and define the strategy. It is critical to understand the strategic objectives of the potential JV and how this fits with the current business strategy for each participant. Is the JV expected to be for a specific project or an ongoing alliance? What is the expected lifecycle of the JV and what are the exit strategies for both participants? Aligning the JV’s goals with each partner is a very important component of the planning process.
- Identify the right partner. The compatibility of a partner is a key factor in determining the success of a JV. What assets and competencies will each partner bring to the table? What synergies will be achieved in the combined JV? For example, a small construction contractor may align with a larger contractor to obtain access to a deep, specialized labor force with financing resources and bonding capacity to assist in completing a project that the smaller contractor does not have the resources to complete on its own. Also, performing due diligence is critical to determine if you are partnering with the right party, which can minimize risk for each partner. Ultimately, structuring a “win- win” relationship with your JV partner will contribute toward success for both sides.
- Plan the JV and commit sufficient resources. To clearly identify the structure of the JV, you need to establish management dedicated to the JV’s operations, document the organizational and operating assumptions, define the governance and risk management protocols, and establish the accounting and financial reporting requirements. Putting the best team in place for the JV is a recipe for success; under-investing in the right people and resources is a formula for failure.In addition, setting and communicating the financial goals should be part of the planning process. This would include identifying capital requirements and compensation arrangements up-front, and defining the framework for the sharing of costs and profits. Proper planning will increase your chances of success in a JV arrangement.
- Manage the relationship. JV partners should treat the relationship like a marriage; it should be built on communication, trust, and understanding. Ongoing communication is critical during both the planning and the operational phases of the JV. It is important to be clear about strategies, including exit mechanisms. Solid interaction between colleagues will enhance productivity and may avoid clashes in culture as well.
Trust between partners may be one of the most integral success factors in a JV arrangement. A lack of trust could be blamed for any unexpected issues or problems that arise during the relationship. Establishing and building trust from the onset will lead to solid collaboration throughout the duration of the relationship.
There are many factors that determine the success of a JV. If a JV structure is right for you, focus on setting the proper goals and strategy, identifying the proper JV partner, planning and dedicating sufficient resources, and managing the relationship with your JV partner. Proper attention to these key elements will likely improve the success rate of your JV and may contribute to the long-term strategic goals of your business.
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