Things To Consider Before Forming A Joint Venture

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Reprinted From: News Journal
Written By: William H. Master, CPA
Once limited to a few specific industries, joint ventures and strategic partnerships are now commonplace.

Consolidation in some industries may make it increasingly difficult for smaller companies with limited resources to survive. Growing opportunities in other geographic or product markets may call for bold moves. Exploring the joint venture option may be the best route to follow.

The key advantages to joint ventures include an improved market or strategic position, increased profits or sales, leveraged financial and human resources and minimal capital expenditures.

There are risks to this process. But avoiding risk may be just as dangerous as being overexposed to it. The trick is how to better manage this risk.

When certain conditions are met, the risk can be reduced and the reward great. Those conditions are; if a company has something valuable to offer a prospective partner and vice versa, if a company has insufficient resources for a new project, if a company faces increasing competition.

If your company considers a joint venture, it is important to weigh management styles, strategic fit, potential size, markets, financial resources, performance requirements, risk levels and social responsibility.

Joint ventures work best when companies are similar in management styles and financial goals. Support at the managerial level in both companies also helps to insure the success of the joint venture.

When considering possible candidates for a joint venture, another important factor to take into account is any past history the prospective partner has with other partners. A good past working relationship builds trust.

Avoid dependent companies that need another company to help them survive. It's also wise to avoid companies that have leaders with inflated egos. The right candidate must be able to partner with another leader.

And never seek a partner based solely on financial resources or personal relationship.

A financial partner usually measures success by short-term return on investment whereas a business partner strives for market share and long-term strategic positioning. When a partner is merely chosen because of the personal relationship, there may not be sufficient motivation or interest to make the venture a success.