Joint Ventures: A Strategy For Emerging Growth Companies

Emerging middle market companies typically lack enough capital to fund such priorities as product development, marketing and geographical expansion to the extent they would like. As these companies strive to get across the Capital Gap, they might consider a strategy to access more resources and attack more opportunities than they can on their own. A joint venture with one or more other companies offers a way to launch a variety of initiatives, including new products and distribution channels—even new lines of business.

A joint venture (JV) is basically a partnership that creates a new entity to which the parties contribute personnel, equipment, cash, intellectual property or other assets. The venture parties agree to a governance structure to manage the entity and a formula to share its revenues, costs and profits. A JV can be organized to execute a project for a defined period of time or can be a business relationship that is intended to be open-ended.

Why a Joint Venture?

With a JV a growing company can access talent or resources that it couldn’t otherwise afford. A JV can be a way to experiment in ways that aren’t feasible internally or could distract from the core business or cause conflict with the company’s culture. Specifically, a joint venture can be a good way for an emerging middle market company to:

• Diversify its product line and marketing channels

• Commercialize new products and services

• Explore entering new markets

• Acquire new market knowledge

• Share investments In projects that carry high business or technical risk

• Expand its ecosystem and sphere of influence

Feasibility: Key Issues to Address

A joint venture should not be undertaken lightly. As with any partnership, there is a risk that the parties will turn out not to be aligned on objectives and the path to get there. A JV creates mutual dependency. It is likely going to be very hard for either side to “swap out” its partner. Legal expense to create the JV and modify its provisions as new situations arise can be significant.

In assessing the feasibility of a joint venture, the parties must address a number of key issues, including:

• The commitment of both parties to contribute the focus and sustain the trust required for a successful partnership.

• Flexibility and a willingness to communicate and follow an agreed upon framework to resolve issues as they arise.

• The fit between the corporate cultures, management styles and leaderships’ personalities

• A model to measure and allocate the economic value the JV hopes to create.

• Protection of the parties’ intangible assets (e.g. IP, knowledge and skills and relationships with customers) from being accessed in ways the parties do not intend.

• A governance structure, especially the framework to address day-to-day problems

The Joint Venture Agreement

A JV agreement stipulates how assets will be deployed and shared in the venture. It defines when and how the partnership will be dissolved. Typical terms call for dissolution of the JV at the option of either partner because of reasons like non-performance by one or more partners; the failure of the JV to meet performance targets or a change of ownership of either party.

Often there is a “sunset clause” that triggers termination at specific time. Typical provisions of JV contracts regarding exit provisions include put/call options held by one or both partners and right of first refusal.

Governance

A management committee to oversee the JV should be established. Its role should include setting direction for the joint venture; making key decisions and monitoring execution of the JV’s strategy. It oversees assignment of decision rights and accountability for results. It guides the commitment of key stakeholders and conducts a dialogue between them about the direction of the JV. Effective governance creates a shared understanding of how the JV creates value. Governance requires consistent communication processes and sustained engagement.

In the next part of this article, I will take up an example of a JV - and suggest some of the risks that JV’s involve.

About the Author

Mark Rosenman has deep experience developing processes, systems and content to create value from intellectual capital. Serving as the Chief Knowledge Officer at Tatum, he successfully drove strategies to develop, capture, share and deploy the knowledge and experience of the firm's professionals. Contact or learn more about Mark here.

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