By Josef Keglewitsch
Getting something right is easier when you understand how it can go wrong. As joint ventures become an increasingly popular mechanism to grow and strengthen the competitiveness of all variety of businesses, taking a step back to understand just how and why they fail can provide a roadmap to avoiding the pitfalls that can turn a winning concept into a losing proposition.
Ill-conceived and ultimately unsuccessful joint ventures tend to share some mix of the following flaws.
Square Peg, Round Hole
Joint ventures are a wonderful tool, but they can only achieve success when they fit the situation. Their beauty is being flexible enough to fit many scenarios, but that flexibility comes with the costs of complexity and a high level of entanglement that just is not a good match for all circumstances.
Begin any consideration of a joint venture by identifying your goals to determine whether a joint venture or a less involved approach (such as a pure licensing relationship, hiring some key personnel, borrowing funds to expand or finding a great vendor/supplier) is more appropriate. Sometimes simpler is better.
Honeymoon Period
It is easy to get caught up in the euphoria of a new business relationship and to fail to scrutinize the partner on whom you are staking so much. A joint venture will not work unless your partner's strengths complement yours and are as advertised. Joint ventures fail because the participants fail to remove the "rose-colored glasses" and critically evaluate the strengths and weaknesses of their potential partners.
A hard, honest look at one's own strengths and weaknesses is also key to finding the right partner fit. There is no substitute for due diligence.
This Thing Can Run Itself
Failing to address management and operational structures comprehensively can be fatal to a joint venture. This is an especially common mistake among joint ventures not having common ownership of the new business entity. Common ownership comes with default decision-making mechanisms provided by law for such entities.
Therefore, contract-based relationships require particular care and attention. Without that care and attention, gaps in coverage result, grinding decision-making to a halt and sparking unnecessary controversies. Similarly, dispute resolution and deadlock-breaking mechanisms are an absolute must in all joint ventures.
Sharing the Fruits
There is no surer way to cause a joint venture to implode than to fail to address how the fruits of the relationship will be allocated. Consider the issue broadly - the upside of the relationship may consist of more than just dollars and cents, which are rarely ignored, but money is typically only part of the picture.
Cutting edge intellectual property, access to new customers and increased market share are just some examples of potential end games for the relationship. Issues such as referral fees, licensing arrangements, royalties and special product pricing may all come into play from time to time.
Who Is Carrying the Water?
Joint ventures often deteriorate because one partner feels as if it is giving the other a free ride. This tension typically results from operational, capital-infusion, staffing and other overhead responsibilities being ignored or inadequately considered. Have these tough conversations up-front and impose some discipline by putting participation hurdles in place along with repercussions for failing to clear them.
Giving Away the Farm
A joint venture should not come at the expense of critical intellectual property or market share. Those burned by a joint venture have often failed to address ownership and licenses of intellectual property contributed to the joint venture and that which results from it (including improvements to each party's intellectual property).
Similarly, ignoring how markets and customers might be allocated to protect core competencies is a recipe for disaster. The relationship should not result in one's partner receiving a free pass to become a competitor. Non-compete, non-solicitation and confidentiality obligations also should be an early topic of conversation in any joint venture negotiation.
Can We Talk?
Communication is critical to the success of any joint venture. Without a framework that encourages the sharing of information and that designates meaningful contact people for each participant, a joint venture is likely doomed from the start.
Why Worry?
Those that have failed have often made the mistake of viewing joint ventures as simple matters of contract with no focused regulation. While this is true to a point, it can prove to be a dangerous attitude if it causes the parties to ignore antitrust concerns, franchise and business opportunity issues and industry-specific regulations that are implicated by many, if not most, joint ventures.
Hitting the Moving Target
Inadequate joint venture agreements typically fail to be crafted as "living" documents that are capable of governing the relationship as it evolves, as it inevitably will. If done properly, these agreements require a great deal of thought and necessarily need to be complex.
Any gaps in coverage can leave the participants vulnerable and lead to expensive and time-consuming conflicts. Hoping to address issues as they present themselves is a fool's paradise that can cause a successful venture to unravel.
This is not Working
Failing to consider exit strategies on the front-end can make parting ways messy and expensive. Joint ventures that end in disaster typically have failed to employ even the smallest amount of foresight.
These issues need to be considered in all cases - even a great joint venture eventually winds down. The goal is to preserve any value generated by the relationship despite its termination and to prevent future disputes.
Any postmortem of a failed joint venture will invariably reveal some combination of these all too common mistakes. While there are certainly no guarantees, avoiding falling victim to these missteps will at least ensure your endeavor a fighting chance at success and provide a soft landing if it does not turn out as planned.
Josef Keglewitsch is a partner in Schottenstein Zox & Dunn's corporate practice group. He can be reached at (614) 462-2700 or jkeglewitsch@szd.com.
Reprinted with permission from Midwest In-House, a quarterly publication of Lawyers Weekly, Inc.
© 2006 Lawyers Weekly Inc., All Rights Reserved.
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April 2006 / MWIH
