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Everyone knows that starting a business is risky but once over that stage most entrepreneurs look to the next challenge – growing the business. In many ways this is much more of a risk as if you get it wrong – and the line between success and failure can be a very fine one – then you will lose your existing business (and income).

In fact this is the time when things can go seriously wrong unless you take the time to stand back, take a long cold look at where the business is, consider where you want it to be in 12, 24 or 36+ months time, and work out how you are going to get there. 

The most common reasons for failure include:

  • Poor planning
  • Poor management
  • Lack of knowledge (of the new market, territory or product)
  • Insufficient finance to see the project through

The first three of these can be addressed by hiring specialist advisors but that will also result on greater pressure on your finances. Yes, you might manage to borrow from a bank (though that isn’t as easy as it used to be in these “credit crunch” days) but that really adds to the pressure later on down the line.

So, what can you do to reduce the risk and access specialist advice without the same level of financial outlay?

Joint Ventures

A joint venture involves two or more businesses pooling their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared.

The reasons behind forming a joint venture include business expansion, development of new products or moving into new markets, particularly overseas.

Your business may have strong potential for growth and you may have innovative ideas and products. However, a joint venture could give you:

  • more resourcesgreater capacity
  • increased technical expertise
  • access to established markets and distribution channels
  • reduced commercial risk

However entering into a joint venture is a major decision. This guide provides an overview of the main ways in which you can set up a joint venture, the advantages and disadvantages of doing so, how to assess if you are ready to commit, what to look for in a joint venture partner and how to make it work.

Types of joint venture

How you set up your joint venture depends on what you are trying to achieve.

One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company’s distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work. I used to be in the book publishing business and it was common for larger companies with their own sales force to also sell books published by smaller companies.

Alternatively, you might want to set up a separate joint venture business, this could be a new company, to handle a particular contract or project. A joint venture like this can be a very flexible option. The partners each own shares in the company and agree how it should be managed. This also limits the risk – if the JV Company fails it doesn’t bring down the original businesses with it. There can also be tax benefits such as being able to avoid capital gains tax if you sell your shares on to someone else.

Joint Ventures must be a win-win situation for all partners so businesses involved with complementary activities or skills are usually the most appropriate candidates. For example, a group of sole traders – a carpenter, builder and gas installer/electrician – could form a company, increase their credibility in the construction trade and bid for larger contracts.

In some circumstances, other options may work better than a limited company. For example, you could form a limited liability partnership (LLP). This is a tax transparent structure and pays no tax itself. Instead each partner has to account for their share of the profits in their own tax return and if a partner is located offshore this could mean they pay no tax at all.

It’s worth taking professional advice to help identify your best option. The way you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong. In any event you will need a clear legal agreement setting out how the joint venture will work and how any income will be shared.

The risks of joint ventures

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

  • the objectives of the venture are not 100 per cent clear and communicated to everyone involved – a good business plan is essential
  • the partners have different objectives for the joint venture
  • there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
  • different cultures and management styles result in poor integration and co-operation
  • the partners don’t provide sufficient leadership and support in the early stages

Assess your readiness for a joint venture

Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy and so the first thing you should do before committing to a JV is carry out a full strategic review – possibly with professional help or guidance.

You can benefit from examining your own business. Be realistic about your strengths and weaknesses – carry out a SWOT (strengths, weaknesses, opportunities and threats) analysis to discover whether the two businesses are a good fit. You will almost certainly want to find a joint venture partner that complements the strengths and weaknesses of your own business.

If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits. Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able to use your joint venture partner’s customer database to market your product, or offer your partner’s services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.

Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.

Create a joint venture agreement

When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevent any misunderstandings once the joint venture is up and running.

The written agreement should cover:

  • the structure of the joint venture, e.g. whether it will be a separate business in its own right, be that a company, limited liability partnership or whatever
  • the objectives of the joint venture
  • the financial contributions you will each make
  • whether you will transfer any assets or employees to the joint venture
  • ownership of intellectual property created by the joint venture
  • management and control, e.g. respective responsibilities and processes to be followed
  • how liabilities, profits and losses are shared
  • how any disputes between the partners will be resolved
  • an exit strategy

You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.

It is essential to get independent expert advice before any final decisions are taken.

Exit Strategy – ending a joint venture

Your business, your partner’s business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.

Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months’ notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out. The original agreement may typically require one partner to buy out the other.

The original agreement should also set out what will happen when the joint venture comes to an end.

For example:

  • how shared intellectual property will be unbundled
  • how confidential information will continue to be protected
  • who will be entitled to any future income arising from the joint venture’s activities
  • who will be responsible for any continuing liabilities, eg debts and guarantees given to customers

Even with a well-planned agreement, there are still likely to be issues to resolve. For example, you might need to agree who will continue to deal with a particular customer. Good planning and a positive approach to negotiation will help you arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards. It can also raise your profile in the business community as a reliable and productive partner.

In conclusion

The following steps must be carried out and once the JV is up and running everything should be monitored and reviewed on a regular basis. Budgets must be prepared and monitored at least quarterly.

Develop the Business Plan

Review your existing strategy and develop a business plan with clear objectives. Ensure both parties are committed to delivery of specific items within clear timescales.

Management

Agree how the day to day running of the operation will be managed and address the practicalities of who does what and who contributes what to the new JV.

Key Issues

it is vital to make sure that agreement is reached on a list of issues that require the consent of both parties prior to any action being taken.

Dispute Resolution

Make sure that a dispute resolution procedure is agreed and that if no solution can be reached that you provide either for one party to buy out the other or if that is not appropriate for the venture to be wound up.

Exit

Make sure a clear exit strategy is agreed either for sale of the JV within a specific timescale or its winding up once the Project is completed.

Valuation

Clearly in an exit or a dispute situation, it is necessary to agree valuation of the shares in the JV Company. Again, it is important to agree at the outset how such a valuation will be conducted. Making the results of such a valuation binding can avoid the stress of a lengthy court action.

Finally

It is vital to have a Joint Venture Agreement reflecting what the parties agree on these issues. Entering into such an agreement at the outset of the project can save a great deal of time and money. It is a lot simpler to agree matters when both parties are in a co-operative frame of mind, whereas waiting until a difference of opinion has arisen is a recipe for disaster and needless expense.

The content of this article is intended to provide a general guide to the subject matter. Specific questions and advice is available from the author by email – james(at)jamesgreenandco.co.uk (use the symbol which is not printed here in order to avoid spamming software).

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Category: Growing a Business

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  1. Joint Venture Intelligence » Blog Archive » disadvantages of joint ventures - October 13, 2008

    […] Grow Your Business With a joint Venture (JV) However entering into a joint venture is a major decision. This guide provides an overview of the main ways in which you can set up a joint venture, the advantages and disadvantages of doing so, how to assess if you are ready to commit, … […]

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