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 track 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.”
Even with the breakneck pace of modern deal-making, there’s a certain appeal to the methodical pace of joint venture development. It’s a marathon, not a sprint — and skipping a few steps early can cause headaches later.
If you’re considering a joint venture, contact your corporate banking relationship manager for additional information.