Businesses looking for growth and profit during uncertain and difficult times need to review their operations, markets, products and business models. Part of the outcome of such reviews are likely to be projects that are suitable for joint ventures or partnerships. Both methods allow for sharing costs and risk in difficult times whilst benefiting from the collective expertise of the parties. Such cooperation is common in several sectors and joint ventures also provide sizeable proportions of the profits of some large multinationals. These techniques might be useful for your business if suitable partners are interested and available.
The use of joint ventures often declines during economic downturns but rises with the start of economic growth. Possibly the planning involved in joint ventures contributes to this pattern. Yet once launched, joint ventures often allow projects to start more quickly as funds, assets and expertise are available more readily available. Partnering with suitable businesses makes managing the challenges of joint ventures easier. Academic research indicates that this results in faster growth than organic growth as well as higher returns on the assets deployed. Joint ventures or partnerships between appropriate parties are lower risk propositions than mergers and acquisitions. In the latter case the differences in the predecessor businesses become immediate, significant and long term cultural and strategic issues. Whilst joint ventures have their challenges, such as the resolution of disagreements or restructuring arrangements, they do provide capital light means to realizing opportunities for growth.
Existing Joint Ventures
Where parties are already in joint ventures, reinvesting in the joint venture may be an easier way to growth and profit than investing in organic growth in the parent business. It may be that third-party financing in a joint venture is more attractive to the financier due to the collective expertise and assets in the joint venture. It may also be more attractive to the partnering parties as the finance is taken by the joint venture rather than directly by their respective businesses.
Joint ventures may enable procurement savings, consolidate back office functions or create efficiency in servicing requirements. They may also enable strategic flexibility by giving your business exposure to more products or services than purely conducted in house. This gives your business more agility to pivot to areas of market growth and profit.
Existing joint ventures are typically not seen by established businesses as their operational focus. Consequently, such joint ventures may be overlooked in fundraising planning. They may also be overlooked because at least another party is involved in the venture's ownership. Consequently, there is debt and equity finance that can be raised from existing joint ventures if the parties can agree. Conversely, a joint venture may have reserves that could be extracted by dividend by agreement of the partnering parties.
During downturns parties review their strategies. Some partnering parties may be content to leave joint ventures or partnerships. The remaining parties can buy into these known, joint venture entities for further growth and profit without the degree of risk involved in mergers and acquisitions with hitherto independent businesses.
For businesses needing to raise funds by selling operational businesses, it may be that a joint venture provides funds whilst also allows for the subject business to be rejuvenated thus growing the pie for all parties. Even if the goal of the owner is a total exit from the business, the sale by multiple stages allows for a fuller expression of the real value of the business to be reflected in the sale price at various stages. This is particularly relevant if the initial purchase into the equity of the business is difficult to value.
Benefits of Joint Ventures & Partnerships
In mature markets with intensive competition a joint venture may increase the chance of the current and future survival of your business. With the right partner this saves money on owning and running assets whilst brings together an existing, complementary product or service range. It also shares risk and resources for developing future lines in that mature, competitive market. Less ambitious measures in a mature market might include joint ventures for non-core assets or auxiliary functions as cost saving measures. Businesses can identify non-core assets and put them into a vehicle which can then be partly sold to a suitable outside party. This way funds are raised, but strategic control is retained to an extent.
Partners in joint ventures might include one with finance and another with expertise and/or another with assets. Partners might both be experts in the trade, but one might have a troublesome business and the other partner is more dynamic with new methods and products eager for some market share. A partner might be a strategic and willing business in the value chain eager to assist in a new development with its complementary skills and resources in return for future profit in the joint venture and within the parent business through the orders it will receive from the joint venture. Co-operation in joint ventures or partnerships within the value chain is often helpful for innovation of new products and services. It focuses the parties on financial, managerial, expertise and resource cooperation to develop the product or service for mutual benefit with the market knowledge they can bring to the project. Large companies in mature, declining sectors may repurpose their businesses by investing in joint ventures with smaller, newer, expert and innovative companies in related areas where the larger partner's assets and expertise can be applied with their junior partner's assistance.
There may be one or more of the joint venture scenarios in the situation in which your business currently sits. There may also be one or more joint venture partner candidates in your business context that can be cultivated from the various joint partner categories set out above. My colleagues and I at Acuity Law have knowledge and experience of setting up and maintaining joint ventures across industries. Discuss your proposed joint venture or partnership with us to see how we can asset launching it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.