When considering formation of a joint venture ("JV") partnership, each party must examine the synergies and benefits of both organizations, as it should be a win-win scenario and mutually beneficial. When approaching a potential partner (strategic or financial) about a potential JV, the approaching party must clearly articulate and clearly demonstrate the potential of the merged organization and the benefits financial each partner will enjoy. There must be clear and demonstrable benefits/synergies that will be gained by working together in a joint venture alliance, compared to working separately (1+1=3 concept). These must be real benefits that are quantifiable and can be measured over time.
Additionally, if you only want the potential partner to sell your product through their data base of customers, this can be perceived as one sided and not a partnership. Make sure you can show your potential partner how the product is relevant to their data base of customers and what your organization can bring in terms of mutual value.
"Say what you are going to do and do what you say", which means be sure to deliver what you say you are going to deliver on time, as your word initially in a JV is your credibility and bond. If you lose that, you have damaged your joint venture possibilities for the future. If you say you are going to create a new product with your JV partner and there is a deadline, make sure you do it. Delivering late or at the last minute can damage a JV relationship and be very difficult to repair later.
A business in crisis or desperation does not make a good joint venture partner, because the organization is not thinking strategically, but only searching for survival. When you approach another business when your business is in crisis, or desperation, or wanting to use them to help you "breakout or launch" your product without concern as to whether the product/service fits, you have presented your business as not being a strong strategic partner. No strategic partner wants a joint venture with a potential partner that is perceived to be in crisis, desperate or not adding value to the relationship.
Make sure you do three things:
1. know your numbers (historical and projected financial results),
2. listen to the potential partners describe their strategy and financial results,
3. ask questions to find out the needs of your potential JV partner and what your organization can bring to the relationship.
When a CEO/Business Owner is skilled at listening and asking questions in regards to their potential partners needs, it creates an environment of trust.
When crafting the letter of understanding before memorializing the JV in a legal document, be sure to make profit distribution equitable for both parties, it is important that both parties gain financially from the JV, but also if cash calls are required, both parties must contribute equally.
Definition of a Joint Venture ("JV")
A joint venture is when two or more people or companies collaborate in an activity that will ultimately result in financial gain that is greater than each can attain on their own (1+1=3 concept). There must be some natural synergy either in product or service that each party can contribute. There is no strict formula for doing a JV, it is very flexible and open to multiple possibilities and variations.
Some of the reasons Joint Venture partnerships are formed are to:
• attract more customers
• cost effective distribution
• eliminate overhead
• increase portfolio of product offerings
• increase customers list/referrals
• retain customers and increase repetitive business
• improve cash flow and profitability
• build a passive or residual income stream
A Joint Venture is when:
1. Two or more parties bring something to the relationship that is complementary (example: one partner has intellectual property the other production and distribution).
2. They create something of value that is more than what they could have done alone (1+1=3 concept).
3. Both parties gain something from the synergy value created (reduction of overhead costs, broader distribution, increased sales force, etc.).
When a Potential JV Partner is an financial investor, and not Strategic Partner there are other considerations:
1. Does the investor know the business and market segment? Does the investor have a complementary business? Why is the investor interested?
2. Does the investor require a guaranteed or a preferred return?
3. What are the sharing arrangements for?
a. Cash Flow - distributions /short falls
b. Tax losses
c. Proceeds from sale
4. When will funds be contributed? How much investment for what percentage of equity?
5. Who controls the investment?
a. New Product R&D
b. Marketing strategy
c. Property management
d. Capital expenditures (new, maintenance, etc)
e. Exit Strategy (sale of the business or refinance of the debt)
6. Voting rights - how will the voting rights be distributed?
7. Will there be an "earn out" formula? If so, who defines?
8. Will the investor guarantee current loan obligations? Corporate or personal guarantees?
9. What intellectual property can the investor contribute? Customer lists, new products, etc.
10. What guarantees are there relative to future funding obligations by the investor?
11. Can the transaction be unwound? If so, what are the provisions? Penalties?
12. Is there a buy - sell provision? Adequate notice to allow time to obtain new financing?
13. What is the joint venture experience of the investor?
14. What is the formula for the release of any cash set aside to cover capital improvements, marketing costs and negative cash flow?
15. Will the joint venture trigger a taxable event?
a. Short term gain.
b. Capital gains.
c. Payment of "soft" dollars (ordinary income) by investor.
16. Will the investor enter existing partnership?
17. Will the investor assume existing liabilities?
18. What reps and warranty will the investor require? Be sure to have and attorney review
19. Will the investor perform like a partner or lender?
As the CEO/Owner of a business considering a financial partner, be sure you are comfortable and have written assurances and the above questions are covered in your legal documentation.
Conclusion:
Joint Ventures either with a strategic partner or financial partner should not be entered into without both parties having Business Plans, strategic three year plans, historical and projected financial results that align the goals, strategies and operational / financial objectives of the two businesses to ensure a financial success.
Keith McAslan is a Partner with CxO To Go a national professional services company headquartered in Denver, Colorado that provides on-demand C-Level expertise and best practices to client companies on a part time, flexible, and affordable basis. Keith is sought after to provide advisory services as the Trusted Advisor to Owners and CEO's. By utilizing his extensive experience as a successful financial and operational C-level executive, Keith brings a results driven leadership style to complex situations.
McAslan's expertise includes: financial advisory; management consulting; part time, interim & virtual CFO, COO and CEO; debt and equity financing; turnaround management; acquisition and divestiture advisory. Most recently Keith, was instrumental in the successful sale of Western Forge to Ideal Industries. As the interim CFO with finance and private investment transaction experience, he guided the management team through the complex sale and due diligence process completing the sale from prospective buyer presentation to close within 60 days. Please contact Keith for a free strategy session at 303-520-2493, [http://www.cxotogo.com], or kmcaslan@CxOToGo.com to discuss your business needs.
Article Source: http://EzineArticles.com/?expert=Keith_McAslan
