Companies look for alliances and partnerships to enter new markets, exploit new opportunities, acquire competencies, minimize the financial risk and achieve faster growth. A clear roadmap marking the way forward in the joint venture is crucial for faster growth. A majority of joint alliance fails due to lack of adequate planning, commitment or internal support to make them work. Successful alliances stand the test of time due to a clarity of vision and purpose.
A joint venture is a technical and financial collaboration either in the form of greenfield projects, take-overs or alliances with existing companies. While alliances and partnerships are in existence for a long time, the rate of failure is far higher than their success. Joint ventures offer companies the opportunity to quickly gain access to new markets or technologies. Partnering up with one or more companies in a joint venture is a way to quickly gain access to new markets or technology.
One needs to be careful that joint ventures or strategic alliances between companies can create multiple problems. When the way forward requires agreement by several partners, it is necessary to look at the situation from each partner’s perspective to determine how they can act and what they want. Often, different players are driven by different factors such as schedule, cash constraints, risk tolerance or customers.
There are two ways to structure a joint venture — either by contract or by creating a separate entity. In fact, the right structure for a joint venture relates mostly to the goals of the parties and how to accomplish it. Each company must note down the points what it exactly what it hopes to get out of this relationship and what it plans on putting into it.
For instance, if both the willing parties are contributing assets to the joint venture and the new entity is going to take those assets and develop a new technology, it will be important to form the joint venture using a new entity that both companies own. In such a scenario, the intellectual property and valuable assets are located in the new entity. Moreover, partners in a joint venture often see themselves as equals. This may raise problems if the company needs to make a decision and both parties don’t see eye-to-eye. Such conflicts must be addressed at the earliest so that the joint venture works properly in the long run. Both parties should work out a clear capital contribution plan, which underlines who is investing what and who is required to put additional cash into the venture if needed.
One of the most important things to consider when forming a joint venture is to see the position of self-interest in case the joint venture is winded down. One must also make sure that both parties have agreed not to separately compete with the joint venture.
A company will invest in another company for several reasons such as the rapid pace of business demands revolutionary ideas, and partnering with industry leaders is one path forward. Moreover, synergies established through investments may create value that could not otherwise be generated. Finally, readily available sources of financing may further encourage companies to seek opportunities to invest. When investing, some companies may not wish to gain control of another entity—or may find it difficult to do so—in which case collaboration becomes the best solution.
Also, the legal form, significance, and economic features associated with investments in other entities drive investors account. Investors may be required to record the investment at initial cost and subsequently test for impairment. In other cases, the value of the investment may be updated to reflect the financial position of the investee. Finally, in any situations an investor can be required to consolidate the investee, presenting the financial position and results of the investee and the investor as a single entity.