While we all dream of making it alone, the reality is that sometimes we do need help on the path of entrepreneurship. That is where joint ventures come in; they give your business the chance to grow thanks to someone who shares your vision.
However, in a joint venture, you lose some control of business decisions, and it is therefore important to enter a venture with someone who has your best interests at heart.
In this article, we will delve deeper into the world of joint ventures, and in turn identify the factors that you need to consider before entering one.
What is a joint venture?
A joint venture is when two parties come together in a formal agreement in order to undertake a single business enterprise that will benefit each party.
A joint venture can be looked at as a mutually-beneficial partnership which serves as its own separate entity. Simply put, my business remains as my own, your business remains as your own, and this business that we are forming will stand on its own.
What is the purpose of a joint venture?
Why would you enter into a partnership with another business when you have the option to expand your own business?
Think of a joint venture as a calculated growth strategy; a business that works better because there are two heads instead of one.
The truth is that as a small business, you are probably only really proficient in one or two areas, be that technology, manufacturing, retail, or something else. Expanding your business into a new market will be difficult if you lack the expertise in a secondary area. Sure, you can get up to speed eventually, perhaps by hiring the right people, or doing the training, but at what cost? And how long will it take?
By entering into a joint venture with another business that has a different skill set than yours, you have the chance to effectively and quickly conquer your target market.
In this way, your combined strength will give you a competitive advantage, leading to lower costs of production, minimized risk, and greater profits.
One great example of a joint venture is the billion dollar video service Hulu, which came about through the collaboration of Disney-ABC TV Group (The Walt Disney Company), Fox Broadcasting Company (21st Century Fox), and NBC Universal TV Group (Comcast).
While one of these large companies could have tried to set up a streaming service independently, forming a joint venture helped them conquer a lot of hurdles that they would have otherwise faced all by themselves, including competition with one another.
That said, entering into a joint venture is no small matter, and it should be considered carefully before any final decisions are made.
In order to stop you from entering into a joint venture that will waste your money, time, and effort, I have outlined the top factors that you should consider. Read these carefully, and then evaluate any offers that might come your way.
10 factors to consider before entering a joint venture:
1. The credentials of your prospective partners
Due diligence is required in any area of life. When it comes to business, you unfortunately can’t always take a person at their word, and it is absolutely vital that you check any information you are given before you act on it.
When it comes to your prospective joint venture partners, be sure to verify any information that they give you. This is a standard business practice that will prevent you from entering into partnerships with crooks and those of ill repute.
2. The values of your prospective partners
When you enter into a partnership of any kind, the success of the partnership is based on the quality of the relationship between the partners.
Partners should have similar values and goals, otherwise they are traveling in two different directions. Your prospective partners should have business values that are in synergy with yours, otherwise you will always be clashing.
So, if your prospective partner likes generating buzz through controversy, but you shy away from disputes, a joint venture does not sound like the best move.
3. The objective of the joint venture
Why are you entering into a joint venture? What goals are you trying to achieve? These are questions that you should answer before you enter into an agreement with another business.
This is also why a joint venture without a purpose is sure to fail. You need to have an objective to work toward, and goals that you can measure during the duration of the relationship.
4. The structure of the joint venture
As I mentioned earlier on, a joint venture functions as its own legal entity. This means that it has a structure that exists apart from yours.
Before you enter into a joint venture, you need to determine what structure will serve you best. The structure that you choose should foster harmony between all parties, and should support growth in the long term.
Furthermore, you should opt for a flexible structure that can adapt to changes in market conditions, regulations, and competition. As a business owner, you know that change is inevitable, and that success happens when you work with change instead of against it. So make sure that the structure of your joint venture can respond to anything thrown its way.
5. The financial contributions of each party
As you might assume, a major cause for business disputes is money. When you enter into a joint venture, finance will be a main concern to you and your partner(s); it is therefore important that you agree on the financial contributions early. You can start by determining how much money each party is putting into the venture.
Once this has been done, it is imperative that you keep detailed financial records. Make sure that these records are protected and accessible to each party. Storing your records in a cloud is one way of doing this.
6. The contribution of employees
For your joint venture to operate, you will need to employ workers. From the get-go you should know whether these employees will be re-assigned from your current business, or whether new employees will be hired. How each party contributes toward employees should be determined from the start.
7. The responsibilities of each party
In a joint venture, responsibility needs to be shared. It is therefore important to outline the specific responsibilities of each party, so that everyone knows their place in the venture.
While it might be tempting to be general about individual responsibilities, the joint venture will go much smoother if all tasks are specifically assigned. Ensure that all responsibilities ranging from management duties to custodial duties are delegated.
8. The intellectual property ownership
If your joint venture revolves around the tech or medical industry, then intellectual property is of great value to your business. Because a joint venture is not part of your business, any intellectual property created during the venture won’t automatically be yours. Therefore, you need to discuss who gets to own any intellectual property created during the partnership.
9. The distribution of profits, losses, and liabilities
Once your joint venture is on its feet, you will be generating profits or losses. It is important for you to know how profits and losses will be shared, and this will most likely depend on the contribution of each party—financial and otherwise. You should also know how liabilities will be assigned so that no one feels taken advantage of.
10. Your exit strategy
When you are creating a joint venture, the last thing that you are thinking of is dissolving this joint venture. However, even in your “honeymoon phase,” you need to be aware that the joint venture might eventually to come to an end. It is therefore important for you to plan how the joint venture will end, and how each party will fair once the venture is dissolved.
This is simply the time to determine who gets what. Who gets which assets? Who gets which debts? This exit strategy will be of extreme value if the joint venture does not end well—if you have ever witnessed an angry couple try and work out a separation agreement, then you know what I am talking about.
All in all, a joint venture allows you to enter into a new market with odds for success on your side. However, in order to succeed, you need to be shrewd from the outset, and these 10 aforementioned factors should guide you during this time.
My advice to you is to think of this stage of the joint venture as a negotiation, where your goal should be to come up with a win-win solution for all sides. I wish you the best on this journey!