The 7 Deadly Sins of Joint Ventures
It's estimated at least 40 percent, and up to 70 percent, of joint ventures fail. Commit just one of the “seven deadly sins of joint ventures” and it’s almost a guarantee that the project will become one of them.
The term “joint venture” covers a wide range of collaborative arrangements in which two or more businesses decide to share the costs, management and profits of a project that achieves a common goal. Successful joint ventures can offer tremendous rewards to entrepreneurs, but those that fail cost entrepreneurs a significant amount of time, money and frustration. Sometimes, even certain intellectual property rights are at risk.
Despite the many different types of joint ventures, the reasons they fail boil down to a common set of mistakes that partners make in the planning phases of a joint venture. Since these mistakes almost always doom the venture to fail, entrepreneurs should take great care to avoid the “Seven Deadly Sins of Joint Ventures.”
Related: Avoid These 7 Partnership Killers
1. Gluttony: Rapid consumption of capital. Many joint ventures use up their initial capital much faster than the partners expected. Partners who failed to plan for the possibility that resources may be consumed too quickly may then struggle to determine the best way to raise additional capital and rush into an unwise loan to raise funds. Prudent joint venturers will anticipate the need for additional capital and determine acceptable sources of funding in the initial joint venture agreement.
For example, the agreement may state that the venture may seek a third-party loan or a loan from one of the partners. The agreement may stipulate, however, that a loan from one of the partners must be on terms comparable to those from a third party.
2, Wrath: Arguments over control. Many joint ventures fail because the partners are accustomed to having control over their companies. Compromise about how to run the joint venture is a struggle.
As arguments erupt, the relationship may deteriorate until the partners can no longer work together. Joint venture partners should assume that there will be conflict. Appoint a board of directors with representatives from both companies to make decisions about how to run the venture. The board can then hire employees or contractors to manage the day-to-day operations.
The joint venture agreement should determine which decisions can be made by management and which decisions require approval from the board.
3. Lust: Desire for assets. In their lust for a partner’s assets, entrepreneurs can make serious mistakes that may undermine the success of the venture. For example, an entrepreneur of a small technology company might agree to give a large corporation more control on the board of directors in exchange for a larger capital contribution. But in the long run, the entrepreneur may lose control over critical aspects of the venture, which could cause the venture to fail.
Partners in a joint venture should make sure that the assets each partner brings to the joint venture, such as intellectual property, capital or equipment, are appropriately valued and translated into reasonable shares of ownership and control.
4. Pride: Culture wars. Most entrepreneurs take great pride in the culture they have built in their company. But when two company cultures are combined into one venture, company pride can lead to unproductive arguments about using one company’s methods over another.
For example, one partner may have a superior manufacturing process, but workers from the other company are reluctant to learn new methods, insisting that the old way is better. Joint venture partners should discuss in advance how they plan to handle cultural differences and, if necessary, train managers to help employees adapt to differences in company cultures.
5. Greed: Unrealistic profit expectations. Joint venture partners naturally want to see profits from the venture as quickly as possible, but distributing profits is rarely as simple as giving each party a share proportionate to their ownership. There will likely be a list of priorities to which distributions must be made, such as loan repayment or reinvesting a portion of the profits in the joint venture.
The joint venture agreement should lay out how and when profits will be distributed and the order of priority in which the profits will be distributed.
6. Envy: Competing partners. Many joint ventures are born from a partnership between two companies that operate in the same or similar industries to accomplish a specific project. As such, the competitive interests of the two companies can create a fundamental mistrust and envy between partners. That may ultimately cause the venture to fail.
The joint venture agreement should set specific boundaries regarding information that must be freely shared and information that may be reserved. If necessary, the agreement should also determine how one or both companies will restructure their operations to avoid any conflict of interest.
7. Sloth: Waiting to plan an exit strategy. During the busy planning phase of a joint venture, founding partners are often slow to plan their exit strategy, assuming that it can wait until the venture is up and running. But what happens if one party breaches the joint venture agreement? Or one partner is dissatisfied with the results of the joint venture and wants to leave?
Partners should, From the beginning of the joint venture, consider all possible scenarios in which the joint venture may end. The joint venture agreement should lay out the terms and conditions for a variety of end scenarios to avoid arguments down the road.
Joint ventures have the potential to be tremendously successful, but certain sins during the planning phases can have a deadly effect on the success of the venture. Entrepreneurs should take care with their partners to avoid these sins when creating their joint venture agreements. If a partner refuses to address any of these “deadly sins” in the initial joint venture agreement, consider finding another partner.