Personal Finance

Tips that will make your joint venture successful

CASE13

Special purpose vehicles by their nature have short lifespans and are created to achieve particular objectives after which they are dissolved. A joint venture is such special purpose vehicle and will help your business grow faster, increase productivity and generate greater profits if implemented properly.

When joint ventures are structured properly, business growth can be accelerated without the need to borrow funds or look for outside investors.

It is correct to say that some joint ventures and strategic alliances are very flexible. Such joint ventures and strategic alliances are created with a limited scope and may cover only part of what a company does. However, partnering with another business can be complex and emotionally demanding. It may also take time and a lot of effort to build the right relationship that will work for the mutual benefit of all parties.

Your company’s success with a joint venture exploration will depend, to a large extent, on the existence of a proper fit in the strategic outlook of all parties. Success will also be enhanced if the objectives of the parties are complimenting, not competing, against each other’s interests.

Once complementarity is established, an effective communication strategy must be developed so that everyone fully understand the business objectives of the joint venture, with a clear entry and start point, and when parties will exit.

Whatever a company aims to achieve with the joint venture, there should be an effort towards making the arrangement fair to both parties. A fair joint venture arrangement should recognise what each party contributes.

It also ensures that parties understand what the agreement is expected to achieve, sets realistic expectations and allows success to be measured or failure to be quantified. The objectives on which parties agree should be turned into a working relationship that encourages teamwork and trust.

There are seven general processes that parties intending to go into a joint venture ought to pay particular attention to in order to avoid unpleasant situations later on:

1. ASSESS YOUR MENTAL AND PHYSICAL READINESS TO ENTER INTO A JOINT VENTURE. Setting up a joint venture is a major strategic leap and may disrupt and permanently affect the structure of your company.

It marks a shift of the existing business model and calls for new innovative ways to accommodate the change.

However beneficial it may be to your potential for growth, you need to be mentally and physically ready for it.

You need to accept that you may need to let go of some practices that, however dear you may hold them, will not fit with the new strategy.

The good news is that it is possible to mitigate the impact of disruption by aligning the new joint venture to companies overall business strategy.

2. PLAN YOUR JOINT VENTURE RELATIONSHIP FROM A POSITION OF STRENGTH. Before starting a joint venture, the parties involved must be very clear on the objectives of the joint venture and understand what they each want from the relationship.

From the SWOT analysis, you should come up with your company’s strengths and weaknesses and identify the opportunities available to the company alongside the threats facing it.

Knowing what your company lacks or is deficient in is in itself a statement of strength and if pursued correctly can lead to new discoveries, greater insights and prosperity.

3. CHOOSE THE RIGHT JOINT VENTURE PARTNER FOR YOUR COMPANY. The ideal partner in a joint venture is one that has resources, skills and assets that complement your own.

It is crucial to note that your competitor may not necessarily make a good joint venture partner, as most of the time you could be having same skills, resources and opportunities while facing the same threats.

To help you identify a joint venture partner, isolate the weaknesses and threats that must be mitigated by that third party.

Thereafter, proceed to identify a partner who can meet those parameters with the ability to significantly underwrite all the weaknesses and threats your company faces.

Leverage on your strengths and the opportunities available during negotiations to derive the best deal to your company.

Do not go for partners who do not have what you lack or who experience similar weaknesses as you do.

4. CARRY OUT DUE DILIGENCE AND BACKGROUND CHECKS ON POTENTIAL PARTNERS. Ensure you perform some basic checks on your new potential partner. With this basic exercise, you might pick some red signs that can guide the remaining processes before sign off.

At a minimum, try and assess existing management team they have and the current performance in terms of production, marketing and personnel. In addition, establish what their customers and suppliers say about their trustworthiness and reputation.

You can then extrapolate your findings and conclude whether based on recommendations of their current business partners you can trust them with your business.

5. ALWAYS PROTECT YOUR INTERESTS BEFORE ANY SIGN-OFFS. Before you consider signing up to a joint venture, it's important to protect your own interests. This should include drawing up legal documents to protect your own trade secrets.

In addition, ensure you sign confidentiality and or non-disclosure agreements to protect any commercial secrets you may disclose.

You need to carry out a thorough due diligence on any representation made by the potential partner to allow for timely correction before sign off.

Existing agreements that could potentially invalidate the joint venture, either with employees, consultants or suppliers, are particularly risky and worthy of scrutiny.

6. THE ORIGINATOR MAKES A PROPOSAL TO THE OTHER PARTY TO THE JOINT VENTURE DEAL. There must be a consideration in a business dealing. Likewise, with joint ventures, there is a determination of what each party brings and what each party gets from the deal.

The party inviting the other can make a proposal on level of investment he or she needs and what the payoff will be like.

This may include offering a percentage of the profits, or guaranteeing returns for specified level of investment. Upon acceptance of the proposal by the other party, the parties can then start the formalities of drafting the main agreement

7. CREATE A JOINT VENTURE AGREEMENT. Involve your lawyer in drafting a written agreement that covers the structure of the joint venture.

The agreement should specify whether the joint venture will be a separate business in its own right, the objectives of the joint venture, the contributions you will each make, whether you will transfer any assets or employees to the joint venture, ownership of any intellectual property created by the joint venture, management and control, respective responsibilities and processes to be followed, how liabilities, profits and losses are to be shared, how any disputes between the parties will be resolved, and an exit strategy on ending the joint venture.