Strategic Joint Venture: Definition, Strategy, Example

Strategic joint ventures (JVs) offer companies an effective means to achieve strategic goals that might not have been possible individually.

Every year, DealRoom works with dozens of companies from across the industry spectrum on JVs.

The breadth of opportunities enabled by these combinations is extraordinary: JVs that bring together construction firms with technology firms, technology firms with distribution firms, and distribution firms with real estate managers.

In this article, we seek to draw on some of the insights gained from these deals to provide an overview of strategic joint ventures.

Strategic Planning for a Joint Venture

A joint venture is effectively a variant of a merger, whereby rather than combining two companies to create one, the two companies contribute resources to create a third legal entity.

Hence, much of the planning that surrounds joint ventures is very similar to that of a traditional merger: defining (preferably in measurable terms) the objectives of the joint venture, understanding how the JV partner fits with your own company culturally and operationally, and overseeing the successful implementation of the new entity, including its corporate governance.

“You can’t have a dominant party in joint ventures. It just won’t work because the other party will feel very disengaged. They will feel that they’re not being heard.”

Key issues to consider when strategic planning for joint venture include the following:

#1 Defining Parameters and Objectives

Like any M&A transaction, the more definable and measurable the objectives of the JV, the more likely it is that the operation will be a success.

Having clear goals and objectives (e.g. nott expansion to the Canada market’ but ‘20 new restaurants operating in Canada within one year’) will also strengthen the proposition when pitching to potential partners.

#2 Choosing the Right Partner

It goes without saying that for a JV to be a success, the partner chosen by a company has to be suitable.

What makes them a better fit from a cultural and operational perspective than anybody else? Are they fully committed to the venture? What issues, if any, can you foresee arising with them that could destroy value in the new venture?

#3 Defining Terms of JV

Even the most successful partnerships can go awry, so it’s important to formalize the terms of the joint venture as much as possible.

Everything from how appointments are made to dividends, investment of funds, and even existing possibilities (see below) should be in writing to avoid conflicts over the course of the Joint Venture’s business cycle.

#4 Ongoing Supervision

Although the joint venture is a company in its own right, it’s still an investment for both the parent companies and as such, requires supervision. The JV will benefit from shared expertise and management that the parent companies provide it.

Many of the JVs that don’t end well are the ones that were simply overlooked as soon as the new entity was created.

#5 Outlining Exit Possibilities

At what stage does your company plan to finish the JV and by what means?

No joint venture lasts indefinitely. They’re either wound down, acquired by one of the parent firms or a third party, or spun off on their own.

It helps to understand at the outset what your company’s eventual strategy is for an exit so that you’re fully prepared for it when the time arrives.

Strategic Plan for Successful Development of Joint Ventures

Define measurable objectives

What are the goals your company is seeking to achieve?
Why are these better achieved with a JV partner?
What value proposition can your company bring to a JV partner?

Draw up a shortlist of potential JV partners

Are there companies your company already works with that represent potential partners?
What traits are you looking for in a partner company or its management?
How will you ensure buy-in from the partner company?

Negotiate with potential JV partners

Understand what they want from the deal.
Seek to identify synergies between the companies and the management.
Identify and attempt to mitigate where difficulties may arise between the two firms in the joint venture.

Create terms of JV agreement

The more defined the terms at the outset, the less likely disputes will arise.
Insert clauses for profit sharing, management input, and eventual exit.

Oversee running of JV in accordance with terms of JV agreement

Exit according to your company’s own strategic plans

Wrap Up

As the speed of innovation ramps up, companies have begun to realize that they can often achieve faster innovation through joint ventures.

In 2022, a string of joint ventures ranging from 2U andGuild Education developing a work education platform to Polaris and Zero Motorcycles creating a JV that develops electric off-road vehicles and snowmobiles.

A company can significantly enhance its strategy horizon by considering joint ventures.

Talk to DealRoom about how we can help in your company’s joint venture journey and broaden your own strategy horizons.