Why Joint Ventures Fail: Some Mistakes to Avoid With JVs
Some reasons why joint ventures fail might surprise you. Whether they do or not, it is important that you understand the major reasons for JV failures, because only then can you do something to avoid this happening to you. Half of all joint ventures fail, and some estimate the figure to be as high as 70%. Before discussing why, let’s first be agreed on what exactly JVs entail.
What is a Joint Venture?
The definition can be fairly wide-ranging. However, in general terms, a joint venture is a collaboration between individuals or companies to share the management, costs and profits of an undertaking which serves the purposes of each party. Joint ventures can offer a great deal of benefit to entrepreneurs, although they can also cost a great deal in terms of cash, time and reputation if things go wrong.
JVs take many different forms, but they all have one thing in common – they can succeed or fail, and the reasons for failure are easily identified. It does not matter what form your JV takes, if it fails it will usually be due to one of the factors we shall now discuss. The corollary of this is that, should you avoid the factors discussed below, then your JV will likely be successful. So what are these factors?
A. Rapid Consumption of Capital
If you fail to budget your expenditure properly, then your capital can be consumed much faster than you anticipated. This can happen for a number of reasons, such as rewarding yourself too quickly or failing to anticipate costs which would have been obvious to an experienced marketer. Make sure you plan properly, and do not spend money on anything unless it is essential for the conduct of the business. Excessive spending is a major reason for the failure of many joint ventures.
Should you run out of funds, then make sure that you consider carefully how to raise additional capital. In fact, this should be part of the initial JV agreement. The source of any loan should be agreed upon, as should be interest rate agreements. No individual partner should benefit from the term of any loan from third parties or from partners to the agreement.
B. Partner Disagreements
Factor A can give rise to disagreement between partners. Such disagreements can be over why capital has been depleted, and what the terms of a third party or partner loan should be. Other disagreements can occur over the running of the business or fundamental policy decisions. Sometimes members of a joint venture will have been accustomed to running their own business without interference or the need to seek agreement on critical decisions.
Such disagreements should be anticipated and a procedure agreed to in the event of them taking place. Any JV agreement should take this into consideration. The sensible action would be to appoint a board that combines senior people representing each party or company in the joint venture to handle any potentially controversial matters anticipated to arise.
C. Partner Competition
This is difference between disagreements between partners and competition between them. Keep in mind that joint ventures are agreed between two competing businesses that have a common objective from which each should benefit. Competition between the two can easily generate a level of mistrust that could destroy the joint venture.
Sharing of information should be defined from the start, as should the respective allocation of profits or benefits arising from the venture. There should be no need for competition, because the allocation of rewards should be defined before the JV is formally agreed.
D. Business Protocols and Conventions
There is always the possibility of a culture clash when two businesses with differing business protocols and conventions are forced to work together. While executives might sign the joint venture agreement, line managers will tend to protect their own way of doing things. This could even spill over into the board room.
Business norms and production techniques are usually sacrosanct to individual companies, and a culture clash often leads to a more serious form of clash. Laboratory staff, for instance, does not take kindly to being informed that “your testing methods are wrong, and you should adopt ours”. “Oh no they are not! Oh yes they are. . .”
Such potential differences should be identified in advance, and managers trained in how to overcome such clashes. In some cases this can go so far as to evaluate the processes of each company and a panel comprising employees of each company deciding on which to use.
E. Distribution of Profits
This is a very common issue in joint ventures, and one which should be high on the agenda prior to the agreement being signed. It is an issue over which it is not always easy to achieve agreement. The larger partner expects the larger share, but the smaller partner may have carried out a disproportionately higher amount of work. One partner might want to cash in before the other.
Not only that, but there might be disagreement over how much profit is used for future development or required for loan repayments. This should be discussed in advance, and agreement reached on such factors before the project even starts.
F. Disagreements over Exit Strategy
It is normal for the exit strategy of a joint venture to be dependent on how it proceeds. It is not normally possible to plan this at the start. There can a lot of trouble if one partner decides to leave earlier than the other, or believes that the results are not heading the way they thought, so wants to exit now.
Before signing up for the JV, partners should look at all the possible options, including the scenario where one partner feels the need to draw out of the agreement. Any penalties involved should be set and the actions to be taken agreed upon before one or other of the parties feels the need to act defensively having already broken the agreement. This must all be settled and agreed in advance.
There are other aspects of joint ventures that can lead to arguments and a serious clash. It is very important that every eventuality is anticipated and discussed in advance. A failure to do this is another major reason why joint ventures fail.
Why Joint Ventures Fail: Summary
Most JVs are extremely successful, and benefit both partners. Nevertheless, if yours is not to be one of those that do fail, then you must consider everything that could possibly go wrong before you put pen to paper. Does each plant have the same union? If not, can they work together under differing working conditions? That’s just one of factors that most senior managers fail to consider.
Ownership of intellectual property is another, and likely not the last you have failed to consider. Think of why joint ventures fail, and then go further. Try to guess some reasons whey they might fail – and get them all out onto the table for discussion between both parties before signing. Then you will have a good chance of success.