Article originally published in the American City Business Journals on September 18, 2018
Over the course of my career, I have negotiated many joint venture agreements. Based on those experiences, in August 2017 I wrote an article on the key questions and issues that need to be considered to maximize the probability of success.
This is an update of the advice I shared in that article.
The time to find out whether the strategic objectives of each party align is before negotiations start. Not having the same strategic objectives is a significant reason that JVs fail.
What would success look like? If you don’t know where you want to go, you will never get there. Is this the right strategic direction for your company?
What are the minimum outcomes you must achieve? If you cannot achieve them, are you prepared to walk away from the table? If not, perhaps you have not yet properly defined your minimum outcomes.
Do you need this deal more than the other party, or do they need it more than you? Are you dealing from strength, or are you in a weaker position? Are the concessions you need to make in your company’s short and long-term best interests?
Every negotiation requires compromise and trade-offs. Therefore, it is important to determine the issues that are deal-breakers for you. Try to determine which issues are deal-breakers for the other side, and decide if you can agree to them.
Spend sufficient time doing due diligence on your prospective partner. Do you and your prospective partner embrace similar values and tone at the top? Do the organizations share similar cultural norms and do they have similar operating philosophies? Will you like working with this partner when the JV is up and running?
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.
Understand the negotiating style of the lead negotiator on the other side of the table. What is their reputation and track record in past negotiations with you and with others? Can they be trusted to meet their commitments?
Listen to the other party and ask questions to further understand what they want to accomplish. Communicate what you want to accomplish. Identify where your goals overlap and where they don’t so you can work to close the gaps.
Will your partner be committed to investing in future operational improvements as well as invest in future JV growth opportunities?
How is your prospective partner financing their portion of the joint venture? How much equity are they investing vs. debt?
If the other party is a subsidiary of a larger company, does the subsidiary have a sufficiently strong balance sheet to meet their financial obligations under the agreement? If not, you should determine if you need a guarantee from the parent company.
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. If you are going to hold a minority ownership position, ensure your interests are protected by the terms of the JV agreement on minority rights, which you should make as exhaustive as possible.
One reason for structuring the JV with majority/minority ownership positions is due to a difference between the JV partners’ financial capacity to make the initial investment or to fund future growth initiatives.
Once you make an offer, wait until the other side responds with a counteroffer or acceptance. If you put another offer on the table before a counteroffer is made, the other side will view this as a weakness and try to exploit it to their advantage.
To avoid not receiving a counteroffer, ensure that your offer is credible. If it isn’t, the other side may just ignore it and not make a counteroffer, prematurely ending negotiations.
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 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.
A joint venture permits each partner to accomplish goals that individually they could not accomplish by going it alone. If done right, the partnership is long-lived and successful for both parties.
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.