November 15, 2017
A joint venture (JV) has the potential to make your business more profitable. With a JV, you can reach further into your market and lower production costs. You can also learn valuable skills.
When a JV between two entities is healthy and thriving, it’s unstoppable. However, success is never guaranteed; joint ventures can start out great and go downhill quickly. The honeymoon phase won’t last forever, and you need to be prepared for that moment.
When the honeymoon is over, you’ll face some tough challenges. Partnerships aren’t easy. You might even regret forming your JV, but don’t be hasty with your decisions. Challenges can be overcome if you know what to expect.
Working with another established business in pursuit of a lofty goal neither of you could achieve on your own is admirable, but you need to approach it with care. Here are some tips to stay alert, and keep your JV from self-destructing:
1. Heed the advice of experienced professionals
A lack of clear expectations and no solid plan are two big reasons partnerships self-destruct. Don’t create your JV on blind faith. Heed the advice of experienced professionals.
In Making Joint Ventures A Strategic Success, Forbes.com turns to Sikander Shaukat, managing partner of resource dynamics of London Business School, for a seven-step process to maximize success. Shaukat describes the following steps for creating a JV:
- Identify strategic logic and drivers. Be aware that your JV partner might have a different approach to how they compete in the marketplace. Sales and servicing, economies of scale, and low-cost offers are all valid approaches. Don’t assume your partner takes the same approach. You’ll feel sideswiped when you find out differently.
- Valuate each firm’s architecture. Shaukat explains that when both companies offer individual products to customers, they can create new, attractive packages for customers. Understanding how this will impact the business environment allows both partners to forecast better.
- Construct an effective operating structure. Even when two companies are in the same industry, operations will differ. You need to know how they prioritize and measure effectiveness to set up the right measures and responses in your JV.
- Define the business model. Your partnership needs a clear model that stands on its own, including legal and financial framework. What will your value proposition be? What are your investments? How will you handle costs, payments, and delivery timetables? Starting a JV is no different than creating a new business on your own.
- Create an economic system. You need a “risk-adjusted cash flow model, break-even analysis, unit costing and economic value-added rationale” for your JV.
- Ensure all negotiations are win-win. Know what’s important to you and what you will accept in a partnership. Understand what your partner wants, too. Compromise is necessary, but nobody should feel like they’re losing.
- Shake hands. Your relationship with your JV partner will be the driving force behind its success or destruction. Your contract is a piece of paper, and only as good as the bond you share.
2. Handle disputes professionally, not emotionally
Nobody agrees on everything all of the time. Disputes between you and your JV partner will arise. If a solution for the dispute isn’t defined in your contract and you can’t come to an agreement, it’s best to seek professional mediation for a workable solution.
Experts from the Rowdy G. Williams Law Firm explain the benefits of mediation, “Mediation is often used as a dispute resolution method when negotiation has not yielded results. In the mediation process, a neutral mediating attorney guides a discussion with the aim of uncovering areas of agreement and disagreement in order to reach solutions to outstanding problems. Each part is represented by an attorney who can protect their client’s interests.”
Don’t get caught in your emotions and try to push your way through to a solution. If you’re not in a financial position to hire a professional, request a neutral business associate to sit with you and your JV partner to help.
3. Be willing to dissolve the JV if necessary
When a JV partnership is on its way out, don’t hang on. When you know the partnership isn’t going to work, be willing to dissolve it and move on. Don’t waste your time with a partnership that doesn’t support your needs. Partnerships are about compromise, but only to a point. The idea is to compromise just enough to make it worthwhile for all partners. If you’re getting the “short end of the stick,” it’s time to move on.