On April 5th, 2021, the Kainach International Forum discussed the topic “Critical Success Factors of International Joint Ventures and Strategic Alliances.” Franz Kolb facilitated the discussion between four panelists talking about how joint ventures can positively impact businesses and especially how small businesses should approach this tricky and often confusing business decision. This month’s four panelists included:
What is the difference between a joint venture and a strategic alliance?
A joint venture is a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities. A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence. The agreement is less complex and less binding than a joint venture. The complexity of a joint venture requires the hiring of a third-party lawyer and legal fees, causing the joint venture to be much more expensive than the strategic alliance.
What are important things to understand when considering creating a joint venture?
When considering a joint venture, a business owner should first understand what options are available. There are other options besides joint ventures, including a strategic alliance or licencing. Joint ventures are expensive, especially when working internationally. When describing the price of joint ventures, Kevin Johnson said, “However much you think it will cost to put the joint venture together, double that, and add 10 percent.” In some instances, a joint venture can reach well over $100,000. A business is also putting its reputation on the line when entering into a joint venture. Lars Johansen said, “Make sure you know your partners, because when you enter into a joint venture, and even a strategic alliance, you put your own reputation on the line. The company that you partner with will impact your own reputation, locally and globally.” A business owner should be sure he or she is entering into a partnership with a reputable company. Because of the complexities a joint venture presents, it is important to make sure that a business owner understands what he or she needs from the joint venture and that there aren’t other possibilities to satisfy those needs.
How do I make sure that a joint venture is successful?
To ensure that a joint venture is successful, there needs to be protection for a company’s technology written into the contract. Technology needs to be protected at all costs, especially when dealing with companies internationally. A dispute resolution mechanism and governing law is also extremely important. All associated parties are ‘happy’ going into a joint venture, however, there are bound to be disputes at some point. There needs to be a way for these disputes to be solved.
The right partner, a good agreement, and mutual trust are needed to satisfy the needs of protection and dispute resolution mechanisms.
When talking about the importance of having a great partner, Nitin Potdar said, “A good document is not a substitute for a bad partner.” It is important to understand what the intentions of a company’s partner(s) are. In this world of globalization and new technologies, there are going to be more and more joint ventures with multiple partners, so it is important to make sure that a business creates a joint venture with good partners.
A good joint venture is grounded in a good agreement, an equally good lawyer should be hired. The lawyer needs to be a business lawyer that understands the needs of the businesses involved. The lawyer is not simply preparing a document for the joint venture, he or she needs to understand the businesses, understand how they are structured, and lay out all of the obligations for the businesses. The agreement needs to include a dispute resolution mechanism and a separation formula. The businesses are going to eventually want to move on, so there need to be mechanisms in place to allow this to happen.
Finally, mutual trust may be the most important part of a joint venture. A company’s reputation will be put on the line when entering into a joint venture, and the company needs to be sure that the partner will help to improve that reputation. A part of mutual trust is understanding different cultures. When going into international joint ventures, differences in culture can present confusion and disagreements. A good way to think about this is to think about the question, “what does yes mean?” ‘Yes’ can indicate agreement, but in other cultures it only indicates understanding. Christa Zengerer has had a lot of experience with international joint ventures. She has seen a lot of good come out of these joint ventures, but one of the biggest challenges she said she faced was different cultures. She said, “Sometimes you have cultural differences that you have to overcome, people in India think differently from those in Austria. Chinese people think differently than Russians. It is very important to have mutual trust and a clear vision and a good contract with clear goals that makes everything a little bit easier.”
What are tips for small businesses that want to enter into a joint venture?
A small business needs to first decide whether or not a joint venture is worth it. Joint ventures are very expensive and small businesses don’t have a lot of cash on hand. Small companies should also avoid entering into joint ventures with larger companies. When a large company enters into a joint venture with a small company, the larger company is expecting to acquire the small company at some point in time. This leads to hostility in the joint venture. Small businesses should consider licensing or other options before entering into a joint venture, especially when working with larger companies. If a small business must enter into a joint venture with a larger company, they have to have ways to protect their technology and protect their voting rights for major decisions.
The entire discussion can be watched here, included at the end of the discussion is a promotion of Nitin Potdar's new book, The GPS Paradigm for Successful Mergers, Acquisitions, & Joint Ventures.
0:00 - Introduction of Panelists
10:26 - What is the good, the bad, and the ugly of joint ventures and how have they evolved over time?
24:59 - What are your experiences of putting mergers and acquisitions together?
29:05 - Why do so many joint ventures fail in the first couple of years?
37:57 - What are your experiences with small companies putting together joint ventures?
44:11 - A lot of international companies are expanding through mergers and acquisitions, what are your experiences with this?
49:19 - Open up to questions from the audience
58:38 - Nitin Potdar discussing his book, The GPS Paradigm for Successful Mergers, Acquisitions, & Joint Ventures