Creating Successful Joint Ventures and Partnerships

Creating Successful Joint Ventures and Partnerships

7 key factors for success

By Marcelene Anderson, MA, CMC

 Every year thousands of companies enter into joint ventures and partnerships with high hopes for successful outcomes. Some will be successful. But many will not. What makes the critical difference? This paper will explore the differences between joint ventures and partnerships, 7 factors for success, the importance of jointly creating a shared road map for the future.

What is a Joint Venture or a Partnership?

Joint Venture 

A joint venture occurs when two parties decide to take on a project together in which both parties are typically equally invested in terms of money, time, and effort to realize the opportunity or concept. They share in the investment (money and or resources put into the business to get it going), take risks (chance of loss), and share profits (money made from a business activity, after investment and expenses).

While many joint ventures are typically small projects, major corporations use them to grow or expand their business. For organizations just starting in business, a joint venture can be a good way to begin. Indigenous organizations frequently enter into joint ventures with non-Indigenous parties to gain experience as well a transfer of skills to be able to operate independently in time. Joint ventures are typically set for a specific, limited time period, including the option to terminate it under agreed-upon conditions or to extend it.

Partnership

A partnership, on the other hand, is a company set up by two or more people or organizations who put money into the business and who share the financial risks and profits.

 Partnerships are frequently chosen to expand business opportunities in a geographical area or to expand the product or service offerings of the partners. Two small companies may not have the ability to increase their markets/business. By combining, they can pool resources and have greater opportunity to increase their business. Or they may want to reduce duplication of functions and related costs in order to increase profitability.

 Partners don’t need to have equal skills or funds, but they must trust each other and share commitment for the success of the project.

 While written agreements are important in almost all business collaborations, they are vital in partnerships and should include provisions for buying out a partner and terminating the partnership as well as cover unforeseen situations.

Challenges In Joint Ventures Or Partnerships

Shared involvement – Businesses do not run themselves. Many business projects require 24-7 time and effort, frequently 7 days a week, 24 hours a day. Business owners are ultimately responsible and cannot delegate away their responsibility or expect their JV or partner to take on all the responsibility and then to equally share in the profits.

A JV or partnership is different from being on a board of directors or council where a director or a councilor is responsible only for making strategic decisions and creating policies but not responsible for implementing the decisions. In a JV or partnership, the partners both are responsible for making decisions and ensuring they are carried out day-to-day. It is a 24-7 responsibility.

 Shared responsibility - A person(s) involved in a joint venture or partnership can no longer make all of the decisions for the business alone. It requires thinking as “we”.

 Shared commitment - One party cannot take a passive role, nor expect the other party to make all the effort and take the majority of risks. For it to be truly a “joint venture,” or partnership, both parties must be 100% committed to its success.

Complimentary contributions - When determining whether or not to enter into a joint venture or partnership, it is important that both parties complement each other in business.

 Shared burden - Because the cost of starting a new project is generally high, a joint venture requires that both parties share in the costs or investment in order to share the resulting profits and or losses. If one party invests more in the joint venture, they typically expect to have a majority position in decision-making and profits.

Clear expectations - To avoid conflict, it is vital that the parties agree at the outset the terms of the joint venture, including the investment to be made by each, how decisions will be made, as well as how profits and losses will be shared. In addition, it is vital for them to decide on the specific time frame for the JV or partnership, including terms for the native party to take over/buy-out and transition ownership over a period of time as well as terms for terminating the relationship.

 Shared communication – A misunderstanding or a lack of communication can damage a joint venture or partnership. Therefore, it is necessary for both parties to be able of communicating their expectations at the start of an alliance as well as to communicate openly and directly throughout the relationship.

7 Success Factors in Joint Ventures or Partnerships 

A JV or partnership can be a disaster or a positive experience. Before you form a JV or business partnership consider the following:

1.   Create A Joint Venture or Partnership Agreement

Parties often create business alliances on the basis of an oral agreement and handshake. While it is vital to trust your alliance partner, potential problems can be averted down the road by drawing up a legal agreement to protect the interests of both parties, including terms for the extension of the relationship or for terminating it. Make it clear at the beginning.

2.   Avoid the 50-50 Split

While it may seem logical and fair to split the share of ownership into an equal 50% - 50%, this ownership structure can create difficulties in the future. Instead of having decisions stalemated, consider a 49% to 51% split. If this is not possible, an outside board for bigger issue disagreements can help your company from being deadlocked on decisions.

3.   Appoint the right persons to the JV or Partnership Board

 Having persons with business experience on a JV or Partnership board is vital for its success and to avoid ineffective decisions and losses. Political leaders often want to be on JV or partnership boards which tend to interfere with their political role and responsibilities as they are spread too thin and may get caught in a conflict of interest. A better role for political leaders is to set up a structure where people with business experience will feel comfortable and want to serve.

Putting the right people on JV & partnership boards, and tapping the business experience of people in your region is crucial for making sound business–economic development decisions. In addition, it is important to continue to develop the expertise of business people for JV or partnership boards.

4.   Create a road map jointly to your shared future direction

 Creating a strategic plan that serves as a road map to a shared future is crucial for the success of your alliance. All parties involved must agree on the same strategic direction they intend to head. If one partner wants to expand outside the territory and the other wants only to make a living, the business will likely have conflict as the parties are not in agreement about the future direction. It is important for the parties to plan together and set a clear plan for the business that meets the needs of both parties.

 Together the parties must create a vision of where they want the alliance to be in the future, articulate its mission and the values by which they will work together, and establish the measures for monitoring progress including financial and other socio-economic benefits. Critical values and expectations need to be agreed upon in advance. In addition, the parties must create a 3-year business plan and one-year operational plan.

5.      Define Business Roles

 A winning business alliance builds on the strengths and skills of each party/partner. It is important to make decisions about business roles based on each party’s strengths.

E.g., one party may be strong in marketing or operations or finance, and the other sales, or human resources or leadership. It is important to get to know each other’s strengths and decide how to best use each of them in the roles needed for the future of the joint venture or partnership. 

6.      Recognize and Accept Business Cultural Differences

Another key factor to consider is how each party does business or its business culture. Even though JV or partnership groups may speak the same language, they may have very different ways of doing business or different organizational cultures.

Organizational culture refers to the shared business beliefs, values, and assumptions held by members of an organization. Business culture is visible in how people do things every day in the behaviors of individual members and in the practices and structures that determine the way work gets done on a day-to-day basis. An organization’s business culture has a significant impact on its ability to fulfill commitments and its ability to get things done. It can support or inhibit performance.

 As you begin a business alliance, it is important to learn about each other’s culture, to identify similarities and differences so that you know what to expect of each other.

Some of the areas that should be considered are decision-making style, how power is shared, how problems are dealt with, risk tolerance, how people communicate, etc.

Lawyers can draw upon legal agreements to serve to protect each party and their mutual well-being, but to really make a joint venture or partnership work requires understanding each other’s business culture. This can be done through a Culture – Strategy Assessment, which provides insight into culture patterns and how these will support or impede strategy implementation and the success of your business alliance.

The recommendations from the assessment report can be used as input into planning for the future, implementing your plans, and for leadership development.

7.   Hold Ongoing, Monthly Partner or JV Meetings

A strong business alliance is built on open and regular communications. It is vital to establish a schedule for meetings in advance to ensure they happen. In addition, it is vital for board members or partners to show up for meetings as a demonstration of their commitment to the other alliance partners. When people do not show up, it causes breakdowns in communications and decision-making.

Meeting on a monthly basis allows for ongoing communication, the opportunity to review progress towards agreed-upon success targets, and progress on strategic action priorities. Regular meetings provide you the opportunity to discuss issues and resolve problems rather than to let them fester.

Summary

Building a business can be more rewarding and profitable in a joint venture or partnership. Consider a joint venture or partnership structure when you have someone to compliment your skill set and add value to your organization. These alliances can work when the right foundation is laid in the beginning. For a businessperson to embark on either form of organization, he or she needs to be committed and willing to work cooperatively with the other party(s) involved.

 About the author: Marcelene Anderson is president of Raven Strategic Solutions and a former partner in the Haines Centre for Strategic Management. She specializes in working with organizations to develop effective joint ventures and partnerships. She has worked with Indigenous organizations and businesses over the last 30 years. She can be contacted at (416) 487-5300 or by email marcelene@ravenstrategic.com or visit www.ravenstrategic.com