Joint ventures have a reputation, and it’s not always positive. The methodical, sometimes grueling pace of joint venture negotiations can trip up even the most willing participant. The key to navigating these waters is through extensive preparation, relationship management and realistic goal setting.
Many joint ventures fall apart from a lack of planning, overzealous negotiations or political/philosophical differences. You can identify some of these danger signs early in the process, to prevent derailing a venture that’s in progress.
However, if you’re just starting to research a joint venture, there are tips you can use to prevent future headaches with negotiations. Here are 5 points to keep in mind when pursuing a joint venture.
This might seem obvious, but joint ventures can easily fail due to competing strategic objectives. Successful joint ventures offer an element of strategic alignment, where the goals of partners and their parent companies are coordinated.
Ask yourself the following questions as you determine each party’s objectives for a joint venture:
These questions help build your cohesive business plan, and avoid headaches later during execution.
In a typical joint venture, the parent executive leadership participates during planning and terms discussions. Once both organizations sign the contract, business managers take over to manage the execution. While this allows the managers and their teams some breathing room to execute the venture, it may result also in discontinuity from the objectives set at the executive level.
In a study on joint venture development, McKinsey & Company argued for the appointment of an end-to-end senior management team to oversee progress. “This creates a balance of executive sponsorship and specialized authority throughout the process,” McKinsey noted in their study.
The McKinsey study also points out a significant factor in joint venture negotiations: most discussions are spent on deal terms, which have far less value to the venture than model or structure discussions. Financial discussions are familiar to any M&A transaction, but your time might be better spent on identifying potential risk factors from strategy and execution.
“Many companies lack the forethought and discipline to address those operational realities at each phase in a joint venture’s development and spend more time on steps where less value is at risk, and less time where more value is at risk,” McKinsey noted in their study.
Well-planned joint ventures avoid the desire to spend excessively at the venture’s launch. Instead, they spend gradually and anticipate future needs, which helps avoid taking out unplanned loans along the way.
Patricia E. Farrell, a Pittsburgh-based lawyer and corporate law specialist, notes this danger in a post on entrepreneur.com: “Prudent joint venturers will anticipate the need for additional capital and determine acceptable sources of funding in the initial joint venture agreement.”
Bringing two distinct cultures together for a common goal sounds great in abstract, but can be perilous if cultures clash during execution. Assume that “tribal instincts” may be present in any venture, and account for differing cultures as you strategize.
Tony Llewellyn, team development director at ResoLux, believes that venture partners need to embrace the differences between cultures, rather than inhibit them.
“The key to success is to invest as much time and cash in shaping the right behaviors as you can afford, Llewellyn noted. “Embracing and celebrating your differences will significantly improve the chances that you will choose to work with your joint venture partner on multiple projects in the future.”
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.
“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.
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:
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.
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.”
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.