Personal Finance

How to grow your business through joint venture or strategic alliances

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Summary

  • As a fast-growing SME, you will likely come to a point when you want to team up with others to accelerate your growth.
  • Your company could also be interested in entering into a new business that requires additional capital and new skills not available internally.
  • This required level of additional capital could be so enormous that you have no chance of raising it alone.
  • Coupled with the fact that you may lack the requisite skills in the new business, the risks now become even higher.

As a fast-growing SME, you will likely come to a point when you want to team up with others to accelerate your growth. Your company could also be interested in entering into a new business that requires additional capital and new skills not available internally.

This required level of additional capital could be so enormous that you have no chance of raising it alone. Coupled with the fact that you may lack the requisite skills in the new business, the risks now become even higher.

This scenario could be devastating should any of the risks crystalise.

The easiest way out is to explore the possibility of entering into a joint venture or strategic alliance with one or more like-minded partners with the capital, skills and experience to advance the new business direction.

The aim of entering into any strategic alliance or joint venture partnership is to accelerate the pace of wealth creation.

We know that wealth is the value of all the assets of worth owned by a person, community, company, or country. It is determined by taking the total market value of all assets and subtracting all debts, sometimes called “net worth”.

Essentially, people, organisations, and nations are said to be wealthy when they are able to accumulate many valuable resources or goods.

Wealth can be contrasted to income in that wealth is a stock and income is a flow, and it can be seen in either absolute or relative terms. We accumulate wealth by developing new profitable income flows.

When you look at a company’s balance sheet you will clearly see this stock in terms of productive assets, and claims against those assets, resulting to a positive net worth. Wealth is measured in positive terms and the higher the positive figure is, the better.

Companies can enter into joint ventures or strategic alliances to create wealth for themselves. It is therefore important to have at least a basic understanding of these two terminologies.

A strategic alliance and joint venture may, however, be used interchangeably to achieve the same goals, but they are not the same. Each has its unique risks and challenges even when they produce the same benefits nonetheless.

Strategic alliance

In a strategic alliance, the partner businesses aim to achieve mutually beneficial goals while remaining totally different entities. The individual identities remain intact. The relationship is a contractual alliance where the partners collaborate without creating a new company.

The separate entities may share resources to achieve their shared goals by combining knowledge, experience, distribution channels, and ultimately filling gaps in their respective operations.

This arrangement can be ideal for managing risk in uncertain markets, sharing the cost of large-scale capital investments, and injecting newfound entrepreneurial spirit into maturing businesses.

Joint venture

With a joint venture, the parties sign a contractual agreement to create a third, jointly owned business. This gives rise to equity joint venture and the partners contribute resources to create the new company.

This third company acts as a unique entity owned by the two businesses as a joint venture, and they each share profits as well as losses. The third company also has shared ownership, risks, and shared governance.

Vertical joint venture contracts

In some circumstances, other options may work better than a business corporation, such as forming a business partnership. You might even decide to completely merge your two businesses in a vertical joint venture. Vertical joint venture contracts are useful to limit the outside activities of partner companies when collaborating on a venture project.

Joint ventures and strategic alliances simply match those individuals and companies with idle or excess capacity with those that require additional capacity and they complement each other.

A successful joint venture or strategic alliance will enable you undertake activities you would not ordinarily take on your own due to internal capacity constraints. They will therefore generate more profits at a super normal rate and help increase the speed of wealth creation.

Pitfalls to avoid

However, many studies have shown that there is a 50 percent chance that your joint venture or strategic alliance will not succeed, especially when you do not deliberately plan to avoid usual pitfalls of wrong strategies, incompatible partners, inequitable or unrealistic deals, and weak management.

Expert advice and professional help will therefore go along way should you want to have a go at this specialised area of strategic adventure.

But it is an adventure worthy of pursuit though. We know of many organisations that are sitting on idle unexploited assets with significant value. These assets are wasting away simply because these companies have no immediate plans to put these assets into use. These assets cost money to acquire, and is a loss to the nation when they lie idle.

Technical know-how

Many jobs could be created, many livelihoods supported, if only the assets were be put to productive use. Take the case of real estate industry in Kenya.

In a presentation at the Annual Summit by the Institute of Quantity Surveyors of Kenya on October 27, 2016, Chis Chiira noted that the prices of property in major cities and especially in Nairobi and Mombasa have sky-rocked in the last few years.

Besides, the cost of borrowing has generally been high and at mostly unpredictable. Taking these factors and others into consideration, Chris further noted that it is becoming increasingly difficult for both land owners and property developers to develop or implement Real Estate Projects.

He developed a case for joint venture arrangements for land owners who lack capital and technical know-how that is necessary to exploit the land and for developers who are faced with high cost of land and lack of access to prime land for development to come together to realise their conjoined aspirations.

He also noted that as more Kenyans seek ways of owning property, joint venture agreements are becoming increasingly popular. He concluded his paper by stating that “if the recent developments in Real Estate are anything to go by, the future of real estate development is in joint venture real estate projects”.