Businesses looking to take their product or brand to a new audience could reap dividends from entering into a joint venture with a partner that offers complementary strengths in a target market. The right partner can bring essential knowledge of local market conditions, culture, and regulation, as well as providing instant access to personnel, infrastructure, and an established customer base.
This speed of gaining access to a new market and its cost effectiveness are the primary reasons a business might opt for a joint venture over alternatives such as organic growth, acquisition, or trading through local distributors.
Thanks to a combination of technological development and increasing globalisation and company agility, this option is now a realistic prospect for medium-size businesses as well as the larger players. The approach can give smaller businesses the opportunity to explore a market without the risk and scale of investment involved in an acquisition, while allowing them to retain greater control over their market strategy and more intellectual property protection than they would if selling through local distributors.
For business owners considering putting their company on the market in the near future, expanding the company’s international footprint can also boost the business’s overall value.
Finally, partnering with a local company can offer a simpler way to access high-growth markets where foreign direct investment is often restricted.
Success factors in a strategic JV
Grant Thornton has set out the following guidelines for companies considering embarking on a joint venture.
- Agreement. Among the terms that should be clearly defined from the outset are the timespan of the venture, performance norms, and governance processes. A joint venture board should be established and agreement reached as to the scale of investment required from each party. Whether the parties will extract surplus cash or reinvest it into the business, along with a potential exit strategy, are other significant considerations.
- Alignment. Successful JVs are founded on shared objectives. The partners’ risk/reward strategies must be aligned to ensure both derive value from the arrangement.
- Development. The strategic partnership, as well as the relationships between parties, are ongoing, rather than static, and need to be developed. Frequent communication is required to foster a feeling of belonging amongst employees on both sides.
- Flexibility. Parties should be aware of potential differences in business culture and decision-making processes and deal with any issues that arise in a flexible manner.
—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.