When a Joint Venture Makes Sense
Your business is looking to cultivate a new project, idea, geography or technology , but you don't want to expend all of the resources necessary to do so. Should you form a joint venture?
This is a seemingly simple question with a complex answer. A joint venture (JV) is a partnership where each partner contributes some assets to an entity while mutually sharing the benefits and costs. Some of the key characteristics of JVs include:
- Owners are separate entities. Unlike a merger or acquisition, there is no transfer of ownership from one owner to the other.
- Alliances can be highly flexible, ranging from one specific purpose or project (often called a consortium) to an open-ended spectrum of results (for example, combining R&D to develop a new technology platform faster than the owners could have done on their own).
- JVs typically have a finite life.
Each of these characteristics can bring new challenges to JVs over alternatives such as M&A or strategic alliances. These considerations include:
- The separation of ownership into two distinct entities makes the JV relationship incredibly complex, not just from a strategic and risk-sharing perspective, but even day-to-day operations in areas such as governance, division of labor, organizational structure and culture. Each organization must now act not only for its own interest, but for the interest of an independent partner firm. Managing the resources of each respective organization can often conflict with providing the right level of support the JV needs. With potentially differing risk appetites, shareholder expectations and corporate strategies, finding the right partner becomes critical to building a successful venture. Additionally, valuing the respective contributions of each owner and subsequent economics will require more negotiating.
- The flexibility of JVs makes defining a strategy and short- or long-term goals essential to success. Without clearly outlined and communicated objectives that support the strategic rationale for a JV, the venture is almost certain to fail. We have seen statistics that say 60% of JVs are a success, and others that say 60% are a failure. Regardless, we believe strategic planning is the largest contributing factor to success or failure.
- The finite life of JVs also presents an interesting dimension. Unlike traditional M&A, where the transaction results in a going concern, or a strategic alliance, which is generally more focused on the current business and ongoing operations, JVs often operate with a limited life (even if it's a long period of time for capital-intensive projects). The consequence is that capital allocation decisions, resource/operational planning and strategic goals all must align with the timeframe of the JV. Furthermore, many JVs result in one partner being bought out, so keeping in mind an exit strategy to realize the benefit of the partnership is important.
A joint venture can be a great way to build a new business faster when your organization lacks the capabilities to do so on its own. JVs also can help your business access foreign markets or reduce the risk of a new venture. Partnering with someone with complementary goals and capabilities, rather than overlapping skills, makes the partnership model more effective, since both partners can more easily distinguish between their contributions and avoid conflicts over what benefit is derived to each.
As always, it's important to weigh the potential benefits with the challenges and considerations before entering into a joint venture.
What's your experience with joint ventures? Send us your thoughts and questions at firstname.lastname@example.org.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.