The common understanding when launching a joint venture is that it; is complicated, involves considerable work, needs to achieve profitability, and one ultimately wants to enjoy what they are doing. Though another consideration would be to assess whether you can avoid setting up a joint venture in the first place, and potentially remain the sole shareholder. Below we will look into a couple of factors that one may consider when seeking a joint venture partner.
What are each parties’ strengths?
When considering whom to collaborate with, you first need to understand your own firm’s strengths and weaknesses and whether having a partner will enhance those strengths and mitigate any weaknesses.
With the understanding of your own firm’s characteristics, have you assessed what any potential partner may bring to the venture, for example, knowledge in; finance, marketing, operations, access to particular clients or intellectual property, other.
On this note, in a particular venture we are assisting with, one of the minor shareholder’s roles is to assist the main shareholder with introductions to a number of their related business contacts. The minor shareholder is hereby lending his reputation, and assisting the main shareholder to avoid an extended period of reaching out to prospective parties and developing relationships. The minor shareholder is thus gaining access to a new business with minimal time constraints on their already tight schedule, and the main shareholder is building a network of clients for the joint venture. Thus, both are able to contribute in the most effective manner possible.
Allotments of equity
Any joint venture will pass through the issue of allotment of equity. One must question whether you need to assign equity to the parties that you may need, to get the project off the ground. For example;
- would it be simpler to pay for certain services (e.g. marketing, introductory fees, other), or
- could a potential partner’s role be better served through a consultancy agreement, or
- could a royalty agreement be a better model than an equity stake; or
- possibly acquiring a loan for financing rather than an equity stake; or
- other.
One must then assess if the equity stake that the potential joint venture partners are asking for is commensurate with the contribution to be rendered throughout the current period and possibly lifetime of the venture.
By divesting the least possible shareholding interest in the business venture, the promoter will be able to protect their equity as the venture grows. This equity may be needed in later periods, for example, to bring a funding partner to accelerate the growth.
Joint ventures in a limited landscape
It must be kept in mind that the business will need to have enough earnings to allow all business partners to be financially motivated. Maltese business economics are based on our geographic insularity and other constraints. If a partnership should be formed, it needs to be financially appealing to all parties.
Conclusion
As any venture matures the role of the different parties may change to adapt to new market demands. Though factoring in that the partners remain aligned in their vision and open to amendments in their agreement, there will continue to be room for all parties to grow within the venture.
idisav 