Well-assembled synergistic Joint Ventures can truly be the key to accelerated growth and success for companies wishing to build rapidly without having to raise or expend large sums of capital through the conventional equity and debt fundraising approaches. Joint ventures are also a wonderful way of rapidly expanding profitability without sacrificing equity or operational control of your business. But what, exactly is a joint venture, and what is unique about its structure?
A joint venture (“JV”) is a special business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. Because of its specificity, a JV is quite different from a full-scale general partnership. Joint ventures can be domestic or international -- in the current economy, international joint ventures are becoming increasingly popular. It is also becoming more the norm for a company to have multiple joint venture arrangements with providers of different abilities or resources.
However similar to a general business partnership which involves a broad business undertaking and a much greater level of involvement and intimacy between the parties involved (a partnership is a monogamous marriage while a JV is a more highly-targeted and limited relationship in terms of both its parties and its activities), the venture is its own entity, separate and apart from the participants’ other business interests.
Although JVs represent an intelligent way to pool capital and expertise and reduce the exposure of risk to all parties involved, they do present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what portion of the profits does party A get? Does the party simply receive a portion based on the original investment pool or is there recognition of the party’s contribution above and beyond the initial stake?
A joint venture arrangement and the agreement which defines and documents the contributions, obligations, rewards and sharing of revenues (not a sharing of profits, as in a full general partnership) by and among the parties requires a careful vetting of the participants, a great deal of initial dialogue between or amongst them and some negotiation of the fine but crucial details of the intended relationship’s purposes and limitations.
One of the most unique aspects of joint ventures aside from their inherent allowance for creativity in structure, is that they can exchange valuable services in lieu of exchanging or investing cash capital. For example, in a joint venture between a startup company and a well-established, larger enterprise, the startup company may benefit by having the administrative, operational and back office capability of its more mature counterpart [and the startup is able to make use of these capabilities without having to capitalize itself with external funds and incur the fixed and recurring costs associated with running its operations].
In the arrangement described in the previous paragraph, the established company may be adding to its potential profitability (and perhaps product or service diversity) by leveraging its existing fixed costs -- this represents growth without incurring additional fixed or variable costs. This increase in operating leverage (or the deeper exploitation of recurring fixed costs endemic to operating a large-scale established business) benefits both companies which are the parties to the joint venture.
In another type of case, a company which may wish to expand the market for its products or services overseas may choose to enter into a joint venture with an overseas company having well-established market distribution channels in that target country in order to increase sales and diversify its customer market base. The first company manufactures and distributes its products domestically, but it expands its markets and market share by entering into a series of international joint ventures with established distribution partners in each of the countries into which it wants to gain access.
In yet another case, a company which is extremely proficient at marketing and which also has a large captive customer base may choose to enhance and increase its supply chain efficiency by having its goods manufactured through a joint venture with an overseas plant that is a skilled manufacturer with a well-established logistic delivery and support system. In this example, the joint venture is just a more intimate means of outsourcing.
A joint venture arrangement and the agreement which defines and documents the contributions, obligations, rewards and sharing of revenues (not a sharing of profits, as in a full general partnership) by and among the parties requires a careful vetting of the participants, a great deal of initial dialogue between or amongst them and some negotiation of the fine but crucial details of the intended relationship’s purposes and limitations.
A well-organized and expert management consulting firm not only locates, pre-qualifies and engages in the selection of a possible joint venture candidates for your specific project and your specific need, but actively participates in intermediating and moderating the dialogue, the negotiation process (as your representative or limited agent) and drawing up [subject to full review by the Client’s legal counsel and tax experts] a list of items to be included in the joint venture agreement.
Your management consulting firm has an ongoing maintenance and monitoring responsibility after the deal has been signed and the operation of the joint venture put into motion by intermediating, as required, between or among the parties to the joint venture or ventures.
In many cases, these special observation and communication activities are ultimately responsible for the success of the joint venture, the accomplishment of its specified mission, and the tone of the working relationship between the parties, which may be from varied countries with varied cultures and customs. Your consultant may even need to provide translators and interpreters as required in order to be certain that there is never a misunderstanding or breakdown in clear communications between multicultural parties to an international joint venture arrangement.
A well-conceived joint venture with the right participants and terms of relationship is the ideal way to accelerate growth and bolster profitability while allowing each participant to simply continue to do that which it does best (i.e., continued specialization and the efficiency that emanates from specialization) and to leverage that particular strength. It also saves each venturer from the potentially costly trial and error process of developing all of the necessary capabilities for success in-house. And most importantly, a joint venture allows for each of the participants to continue to operate in relative autonomy.
As the capital markets continue to remain strained and volatile, and as international consumerism and contracting are on the rise, you and your company may expect to see a great deal more activity in terms of joint venture formation than in the investment banking and venture capital sectors.
Douglas E. Castle for GEI and The Global Edge International Blog
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