Joint ventures can make profitable partnerships

If your business has strong potential but you lack the resources to bring that to fruition – be it due to a shortage of distribution channels, production capacity or even working capital – a joint venture (JV) could provide the step up you need.

For Nadhim Zahawi, chief executive of online market research specialist YouGov, an opportunity arose when he identified the importance of company research for fund managers. ‘We realised that primary, bespoke research is a great necessity for making investment decisions at hedge funds or pension funds,’ he explains.

After discussions with European stockbroker Execution about the best means to deliver this information, YouGovExecution was launched in a 50-50 venture. Zahawi says: ‘We dedicated staff from both sides and created an independent business. I think this is one of the most important things to do, as it ensures that staff members from each business aren’t wearing different hats when they come in to work.

‘You need to address this from the outset if your JV is to succeed. You have to look at the offering and ask yourself where it can go wrong, so you can tackle those problems appropriately from the beginning.’

Setting the boundaries

From the outset, Zahawi reckons you need to demonstrate real commitment by not getting bogged down in risk management exercises. ‘If you’re hedging your bets that early, you can’t really believe in what you’re trying to achieve with the project,’ he muses.

This is not to say you should rush blindly into an agreement with another outfit. Construction group Metnor’s CEO Stephen Rankin, who negotiated a successful partnership with Darlington-based City and Northern for various construction contracts, notes that details must be checked and eventualities given due consideration.

He explains: ‘If you’re working with a company that’s well established and has a proven track record, and you’ve had a look at the accounts to make sure they are financially stable, there shouldn’t be a problem.

‘As long as both companies deliver what they’ve promised to deliver at the agreed quality and price, setting up a special purpose vehicle can help to limit the risk.’

The bottom line is that relationships can easily turn sour through misunderstandings. Rankin goes on: ‘It’s imperative that you set out the criteria for each company’s responsibilities early on, so that neither side thinks they’re picking up an aspect of the JV they’re not supposed to or ends up wondering why they’re giving half their profits away. You have to set very definite milestones and monitor progress through regular management meetings.’

Dominic Berger, CEO of Venue Solutions, reiterates this point, saying that ‘both companies have to agree on a set of objectives from the start and monitor these continually’.

Venue joined video technology company YourDay to provide personalised videos for theme park visitors. Day-trippers wear a wristband that activates strategically placed cameras, recording various moments throughout the day.

Financial sense

Berger comments: ‘JVs should be about mitigating cost, not risk. You need to act positively and have the belief that the shared skills will help you overcome any hurdles. That’s why they work best when there is mutual ownership of the project, with mutually beneficial skills coming together.’

Regardless of how long a partnership lasts, it’s paramount you feel you can work effectively with the company associated with your name and with which you have regular contact.

Richard Cuthbert, chief executive of Mouchel Parkman, approved a 50-50 venture with support services provider Accord to win highway maintenance contracts across the UK. He says: ‘Shared values are just as important as complementary skills. The culture of the people you are going to work with has to fit and that’s not just in terms of senior management – that’s top to bottom. If there’s not that meeting of minds all over, it’s just not going to work.

‘I always say if you can’t tell the difference between them and us – if you can’t see the join – you know you are working with like-minded people. Everyone needs to leave their company badges at the door for it to work smoothly.’

Once the honeymoon is over, there is still a lot to think about. Working with another company poses a number of logistical problems, no matter how much you relate in terms of shared culture.

With the objectives and responsibilities of the venture clearly set out by senior management, ongoing communication between the teams is ‘absolutely key’, according to Paul Davis, finance director of Safeland, a property investment company.

Safeland entered an investment agreement with private equity firm Electra Partners, which provided £15 million for the company to invest in suitable properties through a Jersey property unit trust. Safeland put up £1 million and were responsible for identifying investment opportunities and managing the properties over seven years.

While this is not a typical JV, it exemplifies principles of best practice. Communication has to be spot on between the two parties so that investors, who are eager to protect their capital, are kept up to date.

Davis says: ‘You have to remember that whatever the JV you’re in, it’s a partnership. You have to appreciate that both partners are involved and do your utmost to make sure that they don’t feel removed from the process. Both internal meetings with your team and external meetings with your partner give you the opportunity to discuss your progress in relation to targets.

‘Nobody likes nasty surprises, so it’s important that you are as communicative with the bad news as you are with the good. In fact, more so, because getting wind of good news a day late is generally not a problem.’

That you are likely to have two boards and two finance departments involved in the venture means further headaches if dialogue is sporadic. ‘You need to be working on a level playing field with your partner and that means talking to them. Essentially, you need to trust your partner to keep you informed and vice versa,’ says Berger.

Don’t miss the boat

If you’re unsure about embarking on a partnership, then Berger suggests it might be wise to run a pilot scheme before committing. ‘That way you can set up the structure and see if it works,’ he notes. ‘Things don’t happen overnight anymore and if both parties feel there is a business opportunity there, sometimes you just have to bide your time.’

Interestingly, opinion is mixed on this point. There are those, including YouGov’s Zahawi, who believe that when things drag on too long, something’s probably not quite right: ‘When JVs make sense, they fly through the legal and financial side of things to get started. Don’t be afraid of walking away if you find you’re trying to fit a square peg in a round hole.’

Finding a mutually beneficial way to proceed, as with any marriage, is the essence of a successful JV, but if the market isn’t there, it just isn’t there.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.