CRASH COURSE: Setting up a joint venture

CRASH COURSE: Setting up a joint venture - Promising opportunities are emerging within your business. You daren't miss out, but you haven't the expertise in-house to exploit this new market. You could hire people with the requisite skills, but they're lik

by ALEXANDER GARRETT
Last Updated: 31 Aug 2010

Promising opportunities are emerging within your business. You daren't miss out, but you haven't the expertise in-house to exploit this new market. You could hire people with the requisite skills, but they're like gold dust. Or you could buy another company that has the know-how, though your bankers might need convincing. So that leaves a joint venture. But how can you ensure success?

DO IT FOR THE RIGHT REASONS. There are two main reasons for creating a joint venture, according to Mitch Koza, professor of international strategic management at Cranfield School of Management. The first is that the government in your country of business - for example, China - requires it. The second is where there is a 'significant learning agenda'; this could involve brands, competencies or technologies. A JV makes most sense when you have little understanding of the partner's area of expertise, Koza says; if you know enough to run their business, you would do better to acquire it. Sharing risk can be a reason for embarking on a JV, but be wary of yielding control in return for investment alone.

FIND THE RIGHT PARTNER. As well as complementary competencies, cultural and other 'soft' issues are key. 'Like any partnerships, JVs work well when the relationships between the people are good,' says Peter Hemington, partner in corporate finance at BDO Stoy Hayward. 'If you hammer out a deal but you don't really share a common view then you are likely to have problems further down the track.'

KNOW WHAT YOU WANT. Understanding your own expectations is vital, but be equally clear about those of your partner. 'You have to decide whether the JV is a standalone business or an integral part of your business,' says Teresa Graham, head of business services at accountants Baker Tilly. 'But if one of you is looking at it from an investment perspective without realising that the other partner is looking at it from an operational perspective, that can be a recipe for the relationship breaking down.'

EQUAL IS BEST. A JV in which ownership and control are divided 50/50 probably has the greatest chance of success. 'It puts both parties in the position of knowing they have to make it work,' says Hemington. A minority share should be avoided, he adds; although a shareholder's agreement may give you an equal say, the majority owner will be in a strong position to influence the venture's eventual destiny and will have the whip hand if things go wrong.

PLAN FOR A STAND-OFF. Lawyers will write 'deadlock provisions' into the contract to stipulate what happens when partners can't agree. If you have to fall back on legalities, the JV may be dead in the water, but at least your business interests will be protected.

LIMIT YOUR EXPOSURE. A JV that is mainly about learning, or even marketing, may be set up as an informal alliance. But if serious investment is required, form a company with limited liability; then if things go wrong, your offspring will not pull you down with it.

GIVE MANAGEMENT CONTROL. It's vital the business has a proper management structure and everyone knows who's in charge, says Hemington. 'If you have a succession of part-time people you may end up with no accountability.' WHERE YOU DON'T NEED the skills of your own people, recruit externally, says Graham. 'Those people won't have any baggage.'

BE PREPARED TO ADAPT. Says Koza: 'A JV is a process that requires an ability to adjust and learn over time.' Be prepared to re-write the terms as circumstances change.

DO SAY: 'With your expertise in distribution and our merchandising skills, we'll have an unbeatable combination.'

DON'T SAY: 'The other lot are a bunch of buffoons, but they'll soon find out who's in charge.'

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