Article written by: Joseph Safina | Published by: Forbes Finance Council
Global joint ventures can be a great way to do business. They allow companies to gain access to foreign markets, technology and resources. Companies looking to take their products to new markets may enter into joint ventures with partners offering complementary strengths to compensate for their weaknesses.
Many companies now prefer to create joint ventures as a springboard to overseas markets as they are an easier way of undertaking international trade. The overseas partner provides knowledge of infrastructure, local market conditions, regulations and culture.
However, a global partnership is not easy to come by. It is a risky business strategy that allows companies to build stronger partnerships to fend off competition. Joint ventures can only succeed with proper planning.
To form a successful joint venture, you need to get everything right. The following tips can help you form a seamless partnership.
Your joint venture has a greater chance of succeeding if you find a reputable partner. Ideally, it would be best if you look for a partner that complements your company’s assets and skills.
Your business partner must possess a high level of integrity. To get the right partners, approach businesses you want you to work with. Ensure that the potential partner’s business practices align with your company’s. Having your goals in mind will help you find the right partners for your business.
Note: Only pursue a joint venture if it’s a more viable option than an acquisition, merger or normal growth.
While a joint venture works contractually, both companies should have matching cultures. Conduct a thorough analysis to ensure your partner has value-creation potential. Also, assess your partner’s culture, business approach, decision-making criteria and strategy. Researching these factors may unearth possible future scenarios that could later affect the partnership.
Establish whether you are compatible with your business partner. Unless both parties have similar goals and ambitions, there is no point in making a deal.
Your due diligence should be aimed at a set of predetermined criteria. This enables you to assess and test the likelihood of success or failure. Consulting with advisers during this process can make it easier to discover weaknesses that might hamper the venture.
In my experience, going for negotiations is the most critical part of creating a joint venture. Prepare a team of experts to oversee critical decision-making during this stage. Industry experts are essential as they make “big picture” decisions.
Engage the team in every detail of the transaction. If there is a major issue, deal with it before getting locked into an agreement. Have an empowered team that can reassess and suspend an unfavorable deal at any stage.
Each party enters into a deal with their interests in mind, which may hinder progress. During negotiations, aim for a win-win situation.
Once the negotiators have agreed on a deal, it’s time to create a joint venture. Creating one takes time, and success depends on both partners’ leadership, decision making and strategic planning.
Have a business model that works for both parties. This model should touch on all aspects of the venture, from management to daily operations.
Make sure you have a business plan that outlines all operations. You’ll need to figure out cash flow models and establish key performance indicators for the new partnership. Anticipate changes and prepare your joint venture to adapt to shifts in the business environment.
This process involves a formal contract that underpins the activities of the joint venture. A formal contractual agreement must be carried by a team of commercial lawyers from each party.
This agreement should solidify and strengthen the activities of the joint venture. It should define the following:
• The venture’s timespan
• Duties and obligations
• Guiding principles
• The scale of investment
• Expectations and interests
Ideally, the agreement should touch on every single projected operation. Also, both parties must agree on an exit strategy in advance, should the joint venture fail to materialize.
Much effort goes into establishing a joint venture’s management. The long-term success of the venture highly depends on its management structure. Typically, there are two ways to go:
• Dominant parent management: A dominant parent is a party with a larger stake in the partnership. It may also be the party that contributes most of the venture’s resources. The company that makes more strategic and operational decisions manages the venture as a dominant parent.
A dominant parent situation usually arises when large multinationals form alliances with smaller, overseas companies.
• Shared management: In this type of partnership, both parties share management responsibilities. It is essential in ventures that need both partners’ managerial involvement.
As a rule of thumb, if one party’s operational skills are unnecessary or transferable, the other party should oversee the joint venture. However, if both parties’ skills are essential, they should settle on shared management.
If you want to form a successful joint venture, the steps outlined above are essential. They help alleviate many unforeseen circumstances that might arise later. Always seek professional assistance when making critical business decisions.
ABOUT THE AUTHOR:
Joseph Safina is CEO of Safina Capital, specializing in large-scale funding,
M&A, business development and marketing.