2 Aug 2018, 09:27 — 7 min read
What is a Joint Venture?
A Joint Venture (JV) is the formation of an entity when two or more businesses agree to share and distribute ownership, risks and rewards and operationally come together with a shared governance structure.
Why Joint Ventures
In India, businesses, especially SMEs, have begun to appreciate strategic JVs as an option for business growth only recently. JVs can be a lucrative option for business of all sizes for various reasons:
Risk distribution and management
Sourcing financial and non-financial resources for big projects
New product development
Access to technology & Intellectual Property
Leverage distribution channels
New Market penetration, especially international economies
Enhancing operational capacity
Here are top 3 things you must know about JVs to explore this as a strategic decision for your business.
1. JVs come in different shapes & sizes
Contrary to popular belief, JVs are not necessarily all of the same kind. A JV can be a 50:50 venture or the partnership can be unequally distributed as well. Sometimes, a JV leads to the formation of a new venture, while sometimes the parties may agree to co-operate and share information, channels, distribution, technology, capital and other resources, without actually forming a new entity. The new entity, if formed, may be formed to attain specific objectives as a temporary engagement, or it may be a long-term partnership.
Nadeem Jafri from Hearty Mart who has successfully formed 10+ JVs over the last decade as a part of his inorganic growth strategy shares, “What kind of Joint Venture is suitable for you depends on what benefit you want to extract from it, how much risk and reward you want to share, and what kind of partner you have on-boarded.”
2. Your readiness for JV is the key
Many businesses, especially SMEs, make the mistake of moving too fast without assessing their own readiness. Entering into a JV is a serious affair and entails significant change in the business. It is also a very a high-commitment, high-involvement transaction. Due diligence by your partner before the deal is going to be meticulous and exhaustive. Lastly, there will be a fair share of ups and downs, and your business should be adequately cushioned against the same.
Speaking about preparing for JV, Nadeem shares, “Knowing your strengths is the key to a successful joint venture. That way you know exactly what kind of win-win partnerships to create. Remember, that you must have in place your systems, policies, and overall execution strategy before you even approach a potential partner. These must be communicated to the partners clearly right in the beginning. Similarly, make sure that the risks-rewards and rights-obligations are duly discussed and agreed upon. Conflicts and challenges are inevitable – but your readiness can save you a lot of resources and heartburn in the long-run.”
It is necessary that businesses spend at least 3-6 months preparing for a JV before looking for partners. Take this time to arrive at a realistic valuation for your business, sort your financials, streamline your team, prepare for due diligence, restructure your client portfolio, establish market networks and consolidate your business into a viable opportunity for JV partnership.
3. The right partner can make or break a JV
The key to a successful JV is complementary competence. Remember, it is not merely about the business indicators like performance of products and services, technology integration, financial health, market share & position, and so on. You need to carefully consider the softer aspects too like organisation culture, vision and mission, reputation, business objectives, attitude towards collaboration, etc. Here are a few parameters to consider before signing up a JV partner.
Is there a possibility for win-win? i.e. do you complement each other’s businesses in a major way?
Do you have a set of common business objectives? Is there a overlap or complementary relationship between their vision and yours?
Are you both financially secure?
Is there stability in their top management?
Are your management approaches compatible enough to work with each other?
Is there any conflict of interest in your policies, governance and business practices?
So, what does Nadeem see in his partners? “Compatibility is the key,” he says. “I have been familiar with the farmer-restaurant community in Gujarat right from the outset. Familiarity and trust creates partnerships that stand the test of time. Apart from that, their entrepreneurial skills, vision, financial prudence and overall management all play a role. Since we have a single CEO guiding and mentoring all our JV partners, standardization and cross learning has been a boon. Our partners trust us for the value we add to them and the transparency of our transactions. We are in this together.”
It is also of paramount importance to have professionals on-board to assess the potential of a JV deal. You need to put in black and white all the rights and obligations of both parties, factoring in the possible contingencies that may occur in course of execution of the agreement. Last but not the least, remember that like any other collaboration, JV is not only a transaction but also a relationship – you will have to work towards it with diligence and honesty.
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.
Posted byBhavin Sanjaybhai Bhagat
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