Joint ventures can simplify the new entity created by two or more businesses pooling their resources to create value and gain a competitive advantage. However, they are notorious for failing and creating a falling out between the members involved. Below, we discuss some common mistakes and assumptions that cause joint ventures (JVs) to fail.
Some enterprises successfully begin and run on joint venture structures for years. But in the same way as in all models, a joint venture structure is not always the best business model for all companies. If the goal of the enterprise is essentially to combine ideas and capital, acquiring an investor may be more beneficial than a partnership. JVs often fail because the parties set-up the company prematurely before establishing a strong business that benefits from the JV structure. The members involved must ask themselves if their goals lay out a strong case for a JV structure or if a different business model poses a better fit.
It’s very common to get swept up in the productivity and value to be created through a joint venture and begin with optimistic financial modeling. Products or services may take longer to finalize, the venture can use up cash much faster than expected, and the results hoped for may not come as planned. Inaccurate or hopeful financial modeling is never helpful because it can cause unnecessary disappointment, loss of enthusiasm and trust between parties.
Failure to plan
Sufficient planning at the start is vital to the joint venture’s longevity and success. Consider, discuss and plan for potential issues such as each party's risk opposition, dispute management, and potential growth of JV services. Working with the wrong JV partner can lead to conflict, doubts and limited engagement. Open communication and deliberate planning is necessary to explore and work out how aligned the members are in their efforts to achieve the goals and success of the joint venture. If one party is less committed than the other, the JV is less likely to work.
Working through potential legal issues is necessary. Getting both parties to discuss and arrange early termination and exit strategies at the outset makes the conversation easier if the time ever comes for dissolution. Discussing and recording possible triggers for termination and exit scenarios will build your relationship on honesty and openness, which creates confidence between partners. It’s always better to know if you're on the same page sooner rather than later. Working through possible issues at the outset creates a strong foundation for the JV to endure if they occur.
Biased management and control
JV partners are used to having complete control, and micro-management by JV partners can be fatal. If the venture is to be actively managed by one of the parties, clearly stated management terms and performance indicators are essential. Confidence and accountability issues can emerge between parties if things don’t go according to the business plan.
Unequally valued contribution
Each party contributes a different skillset or resource to the venture, such as expertise or money. When a member’s contribution to the venture becomes less valuable over time, the remaining partners may begin questioning the need for the JV. Fairly measuring and clearly defining qualitative inputs from members are important to insuring that each party knows what is expected of them.
Creating an environment in which a JV can thrive requires a clearly defined and understood purpose and goals that could only be met through the JV structure. JVs have the best chance for success when partners are compatible, are honest and realistic about management, goals and success, and have prepared reasonable approaches to diffuse potential issues if they arise.