A joint venture is a business marriage of a sort. Each company has strengths and weaknesses and to work on something so they can both profit, they enter into a joint venture for a service or product. The hope is that by working together, they can make more money than if they worked separately.
Like marriages, joint ventures don’t always work out. The joint venture may have been a bad idea to begin with, the market may not have been as strong or as mature as the companies hoped or perhaps they just didn’t work well together. Patricia Farrell’s piece in Entrepreneur magazine discusses the “seven deadly sins” that frequently break up joint ventures.
Many joint ventures use up their initial capital much faster than expected. Failure to properly plan for the possibility that resources may be consumed too quickly may result in unwise loan to raise funds. Prudent joint venturers will anticipate the need for additional capital and determine acceptable sources of funding in the initial joint venture agreement.
Arguments over control can occur because partners are used to having control. Compromise about how to run the joint venture may not be easy. The relationship may fall apart and partners may no longer want to work together.
Partners should assume that there will be conflicts at some point. If a board of directors with representatives from both companies is appointed to make decisions about how to run the venture, they can then hire employees or contractors to manage the day-to-day operations. The joint venture agreement should spell out the decisions to be made by management and which ones need board approval.
Desire for a partner’s assets can result in serious mistakes that may undermine the venture and the relationship with the partner. Venture partners should make sure that each partner’s assets (such as intellectual property, capital or equipment) are appropriately valued and translated into reasonable shares of ownership and control.
Most entrepreneurs take great pride in their company’s culture but when two company cultures combine, pride can lead to unproductive arguments about using one company’s methods over another. Partners should discuss in advance how to handle cultural differences and train managers to help employees adapt to differences in company cultures.
Partners want to see profits from the venture as quickly as possible, but distributing profits isn’t always as simple as giving each party a share proportionate to their ownership. There may be priorities for distributions, such as loan repayment or reinvesting a portion of the profits. The joint venture agreement should lay out how and when profits will be distributed and the order of priority in which they will be distributed.
Many joint ventures are created by two companies that operate in the same or similar industries to accomplish a specific project. Their competitive interests can create mistrust and envy between partners that may ultimately cause the venture to fail.
The joint venture agreement should set specific boundaries regarding information that must be freely shared and information that can be restricted. The agreement could also determine how one or both companies will restructure to avoid any conflict of interest.
Founding partners may be slow to plan their exit strategy, assuming it can wait until the venture is up and running. Partners should from the beginning of the joint venture, consider all possible scenarios in which the joint venture may end. They should lay out the terms and conditions for a variety of end scenarios to avoid arguments down the road.
There are many ways a joint venture can run aground, but if it’s properly and sufficiently thought through and a comprehensive joint venture agreement is executed by the parties, the chances of success can increase dramatically. If your business is considering a joint venture, or if it’s involved in a joint venture that’s not living up to your expectations, contact my office. We can talk about your situation and discuss ways to prevent future problems and resolve current ones.