Article originally published in the American City Business Journals on September 19, 2017
I recently wrote an article titled “7 principles for effective negotiations” in which I describe the primary principles of any negotiation. In today’s article, I outline five questions that need to be addressed by those about to a negotiate a long-term strategic partnership, such as a joint venture.
1. Do you and your prospective joint-venture partner share the same strategic objectives for the JV?
The time to find out whether the strategic objectives of each party align is before negotiations start, not after the JV is up and running. Not having the same strategic objectives is a significant reason that JVs fail.
Will your partner be committed to investing in future operational improvements as well as invest in future JV growth opportunities? Find out now rather than later.
2. Does your prospective partner have similar values and ethics as your organization?
Whether entering a new business with a JV partner or buying the JV ownership interest of an existing business, spend sufficient time doing due diligence on your prospective partner. Do the CEOs of each organization embrace similar values and tone at the top? Do the organizations share similar cultural norms and do they have similar operating philosophies?
If values, tone and culture are not compatible, the time to know is before discussions get too far down the road. End the discussions if the differences cannot be bridged.
3. Does your prospective JV partner have the wherewithal to meet the necessary financial obligations?
How is your prospective partner financing their portion of the joint venture? How much equity are they investing vs. debt? The higher the debt, the higher the potential of them walking away from their obligations in the event of a downturn in business — which may make your company liable for their debt obligations.
If the other party is a subsidiary of a larger company, does the subsidiary have the assets to meet their obligations under the agreement, or should you get a guarantee from the parent company?
4. Will the JV be a 50/50 partnership, or will one partner have a majority ownership interest?
I have participated in joint ventures holding majority, minority and 50/50 ownership positions. I prefer majority ownership to ensure operational control of the joint venture, even when the appointment of the CEO rotates between the partners in the JV.
It is not always possible to get your prospective partner to agree to your desire to have a majority ownership position and the best that can be achieved is a 50/50 ownership interest. Or, your partner may insist on a majority interest. Holding a minority ownership position, your interests are protected by the terms in the JV agreement on minority rights, which you should make as exhaustive as possible.
A reason for majority/minority ownership positions is if there is a difference between the JV partners’ financial capacity to make the initial investment or to fund future growth initiatives. In these cases, the partner with the higher capacity takes the majority ownership position.
5. Does the joint venture agreement include a satisfactory divorce process?
What are the terms governing the termination of the JV? Some JV agreements include a “shootout clause,” in which one party makes an offer that must be accepted or alternatively topped by the other party.
A shootout clause is potentially dangerous for either party and therefore, if included in the JV agreement, it is rarely exercised. In the divorce negotiations in which I have participated, the threat of either party using the shootout clause drove both parties to enter into good-faith negotiations with each other and reach agreement on the terms of exit without the use of that clause.
In any negotiation, carefully review contract terms and obligations. Certain events may have a low probability of occurring but could have a catastrophic adverse impact to the venture or to your company as a partner in the venture. Operationalize all scenarios that could occur to determine their impact. This is important before entering any business arrangement.
Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor and nationally syndicated writer on leadership, entrepreneurship and corporate governance. Silverman earned a Bachelor of Science degree in chemical engineering and an MBA degree from Drexel University. He is also an alumnus of the Advanced Management Program at the Harvard Business School. He can be reached at Stan@SilvermanLeadership.com.