You might have a killer idea, but lack the resources, finance or knowledge of a particular market to deliver it. Sometimes, collaborating with another business that is able to plug the gap can be the way forward, giving you credibility as you move into a new area.
What’s more, when the economy is shaky and access to capital is scarce, sharing the risk and pooling your resources with a partner can be a great way of strengthening your proposition.
“Given that we’re in the thick of a credit crunch, I think businesses will look harder at joint ventures,” says Peter McHugh, a partner at law firm Pinsent Masons. “There will be great opportunities, and the ability to combine with another like-minded entity with complementary strengths will offer a competitive advantage.”
However, joint ventures (JVs) are complex relationships and take many different forms. They also need careful planning to make them work. We spoke to entrepreneurs who have been there to find out the secret behind a successful JV.
Is it right for you?
If you’re stepping out of your comfort zone, whether it’s away from your core business area or into a new territory, acquisitions become riskier because you have less knowledge of what you’re buying into. “In that case, a classic way of seeking to grow the business is to buddy up with an expert in that field,” says McHugh. “Say you’re thinking of expanding into China. If you know nothing about the country, starting up, or buying a business there are risky strategies. The logical route is to collaborate with a third party to deliver a mutually beneficial outcome.”
Sometimes, JVs are simply a contractual relationship, where a business wants a partner to embark on a project, from developing a new product to researching a new market or tendering for a large contract. Depending on what the objectives are, you may want to take your collaboration beyond this to form a company that each partner owns shares in.
Whatever type of collaboration you’re thinking about, there have to be strong commercial drivers. “The first step is to ask why you need to do this as a JV’?” says McHugh. “Both parties have to be able to understand how they can derive significant commercial benefit.”
Rosaleen Blair concurs. She set up her recruitment outsourcing business, Alexander Mann Solutions, as a JV with its namesake, the recruiting giant Alexander Mann Group. She joined the company 13 years ago as an employee, and after six months had the idea for the business.
“I’d written the business plan, found my first client and decided to do it myself,” she recalls. “But the chief executive encouraged me to do a JV with the group.”
The business now turns over £340m,
and following a £100m management buyout (MBO) in December 2007, Blair
and her management team own 35%
of the company. However, she admits that before the MBO, while she had total control in terms of running the business, ownership and value creation were “disproportionate” between the two parties, and not in her favour. “I’d think very carefully about what you are gaining from it,” she advises. “I would be certain that you had worked out what it would take for you to do it yourself with the right support before you give away too much of the company or your ideas.”
So does Blair regret her decision? “I think hindsight’s a wonderful thing,” she says, adding that, at the time, her options were limited, with non-compete clauses restricting her for at least six months. However, she stresses that there are often circumstances where a JV is absolutely the right move – when there is a window of opportunity and you need accelerated geographic expansion or to take a product to market quickly, for instance.
Finding a partner
If you decide that a JV makes commercial sense, the next step is to form an ‘identikit picture’ of your ideal partner in your head, says McHugh. Typically, JVs come about when two (or more) partners have complementary skills and their combined strength is far greater than the sum of the parts. “They may not be equal in size, but they must be equally matched in what they are bringing to the venture,” says McHugh. “Large and small can get together, but strong and weak can’t.”
Blair recommends spending a lot of time researching your prospective partner, speaking to as many people as you can who have had different types of experiences with them. Of course, you want an alliance that will lead to a lucrative outcome, but knowing you can work with someone is the most important thing. People buy into people in business, and if the chemistry’s wrong it won’t work.
“There has to be an engagement of personality, and mutual trust and respect,” says Jonathan Metliss, a partner at law firm Davenport Lyons. “No document is going to hide any cracks in the relationship.”
Indeed, one of the biggest threats to a JV is an initial deal that is significantly more favourable to one partner than the other. The disgruntled party will dwell on the deal rather than focusing on growing the venture. “You want to have a situation where the contract is something that sits in the drawer and gathers dust,” says Len Dunne, managing director of Galleon Entertainment, a division of AIM-listed Galleon Holdings. “If it’s going to work, both parties have to see it as a good
deal from the start.”
