This article discusses the top five trap areas causing the current failures of joint ventures and partnerships.
It is still true that most M&A teams and professional investors dislike joint ventures and partnerships. They are regarded as slow, complex, and risky, with only at best a 50-60% chance of success.
With respect to a partner organization’s strategy, problems often develop when parties fail to overtly discuss the business strategy and goals or the business structure is decided upfront before any discussion concerning the parties’ contribution.
Not dealing with problematic issues upfront is both foolish and risky, whatever the legal agreement says. Identifying and overcoming these early delivers payback in good will and positive momentum as the partner organization moves into operation.
When parties have little knowledge of each other’s capabilities, or the parties do not clarify the scope of operations for the partner organization, the operating model suffers.
Too often equity, voting rights, operational control, and profit distribution are treated as one and the same. They are not. The best structure for any partnership organization should be one which best supports delivery of the business results.
A failure to understand the organizational and cultural effects—whether through underestimating cultural differences between the parties or overestimating the mutual trust between the parties—can lead to a partner organization being unsuccessful.
The governance of the newly created partner organization should be adequately developed by the parties. “Normal” decision-making practices should be tested in the partner organization’s proposed governance model to ensure its effectiveness.
The appropriate monitoring and, if necessary, intervention once the partner organization is operational, is of critical importance as well. Parties should not simply assume all will run as expected; rather, the parties should have agreed upon procedures for both monitoring and identifying warning signs as well as procedures for escalating and intervening.
Key risk and performance indicators identified during the deal should be turned into actions and accountabilities once the partnership organization is operational. Leading indicators should also be set up to monitor progress and detect issues early.
No deal is immune from market conditions. Continuity cannot be taken for granted and assumptions must always be tested—even at the risk of offending one’s future partner.
The good news—these pitfalls are readily avoidable through good early planning, withstanding ‘deal fever’, and receiving quality, specialist advice.