Telltale signs of joint venture problems

Identify potential joint venture challenges to boost the odds of your business partnership’s success.

Tags: M&A
Published: May 30, 2018

While the ink is still wet on a freshly signed joint venture agreement, spirits are high. Optimism abounds for growth, innovation or capitalization on this new market opportunity.

Regrettably for some, the goodwill can turn sour, and problems can arise. Research from Water Street Partners, a consulting firm specializing in joint ventures, indicates that about half of all joint ventures will fail to meet shareholder expectations. Water Street Partners notes that failure is usually due to strife over financing, operations, alignment and management.

“It’s a lot like a divorce, where the kids suffer when the parents are not getting along,” says Patricia E. Farrell, a Pittsburgh-based corporate and business attorney. “Decisions that need to be made to improve conditions — or maintain conditions if they’re not suffering — are not made, because the companies can’t get along. And like kids in a divorce, the employees pick sides and the whole thing starts to unravel.”

 

Wounds cut deep

Frequently, such symptoms reflect deeper conflicts. These can stem from friction that arises when groups of people, from two different enterprises, with dissimilar corporate cultures, are pulled into a new entity.

“And it’s not just differences between a U.S. company and an overseas one,” Farrell says. These differences can be generational, such as between millennials and traditionalists. Or structural, such as between a family-owned company versus a venture-backed one.

These differences might also be based in financial wherewithal: “It could be a cash-rich company matched with a cash-poor company that has the key technology,” Farrell says.

 

Joint venture trouble

Issues within a joint venture can be as varied as the types of joint ventures. Consider these signs — they could mean your joint venture is headed for trouble:

  • Disagreements over capital investments may point to a marked difference in financial vision for the joint venture
  • A failure to collectively plan around strategic goals could indicate that the joint venture may not be well thought out
  • Inequality (actual or perceived) in management can make decisive, collective decision-making difficult, or impossible
  • An inability of teams to sync can prevent work from getting done
  • Operational inefficiencies that may diminish returns and lead to recriminations
  • A see-no-evil approach to risk, can cause teams to overlook trouble signs 

Avoid a downward spiral by addressing the early signs of joint venture trouble.

“You must ensure what’s known as procedural justice,” says Benjamin M. Cole, an associate professor at Fordham University’s Gabelli School of Business. “Whoever is in charge of that entity must act so that decisions are perceived to be fair and executed in a fair-minded manner.”

Cole adds that uncertainty over roles can be just as toxic. “If it’s unclear who’s responsible for what, that role ambiguity can kill a joint venture,” he says.

 

Avoid trouble from the start

If you’re building a joint venture with another company, Farrell recommends crafting a thorough business plan before signing the final agreement. A business plan helps ensure that you’ve worked through a detailed budget and agreed to governance matters. This should include ways to update the venture’s business strategy, revise operational plans as needed and execute an exit plan if discussions fall apart.

Cole says it’s also essential to address potential flashpoints related to reporting systems, transfer pricing and existing corporate ties to either company.

“Some of these discussions are uncomfortable, especially in what’s seen as a ‘friendly transaction,’” Farrell says. “But the way you keep it friendly is by making sure everyone knows the rules and understands how things are going to work, no matter what happens.”

 

What to do when trouble hits

If you’re part of an existing joint venture and experiencing some of the danger signs listed above, it’s time for an objective assessment of the situation. This is where an independent voice — ideally with no previous ties to either parent company — should be loudest in determining the way forward.

“Plus, the lender needs to be on board with any plans and discussions,” Farrell says. “Maintaining a good relationship with the lender — or whoever has funded the project — is the best course of action, because if you haven’t advised with them, it can exacerbate a problem.”

 

Ultimately, for all of the promise a joint venture holds, its success hinges considerably on the work done in its formative stages. Your banking relationship manager should be able to help your organization navigate a joint venture, from setting one up to identifying any potential challenges.

 

©2018 U.S. Bank. Member FDIC.