Friday, March 26, 2010

The Virtues of Joint Venturing

Small businesses face multiple hurdles new and old, from identifying lucrative contact opportunities to determining how best to use limited resources to penetrate new markets. In this post, I will extol the virtues of joint venturing or teaming with equals or larger companies to gain a competitive advantage and multiply earning potential.

As a lawyer, I see companies, particularly closely held businesses, grapple with subcontracting agreements and similar contractual arrangements in which they have little leverage to shape the final terms. The scenario usually involves me reviewing a subcontract with terms such as: “the subcontractor shall not be paid unless and until the owner approves of all work performed …” and “in the event that the owner does not pay the prime for any reason, the prime shall have no obligation to pay the subcontractor.” Another favorite: “as a condition precedent to final payment, the subcontractor shall execute and deliver to the prime a release of all claims against the prime and the owner arising under or by virtue of this agreement.” I promptly revise the most offensive terms, the other party or their counsel objects citing their reasons, and in the end the parties have a finished product that reflects their unequal bargaining positions.

Joint venturing, which is simply forming a strategic alliance with one or more other businesses, could be a powerful weapon for these businesses and a more advantageous alternative to the traditional subcontracting arrangement. In the case of a small business teaming with another small business, the advantages are evident:
(1) each company maintains their autonomy (making teaming a superior alternative to mergers);
(2) the companies collaborate to compete for business they could not otherwise hope to win on their own; and
(3) most importantly, they equitably split the rewards of their labor.

Incidentally, government contracting officials and others with a vested interest in small businesses winning their fair share of contracting opportunities often report that small businesses would be much better positioned to win and successfully perform contracts if they simply joined forces with one another. What’s more, the value and potential of both companies suddenly expand manifold.

The big guys are adept at this. In a recent issue of Business Week, for example, an article about Thermax, Ltd., an Indian power equipment maker, noted the company’s market value rose to its highest in seven weeks after it merely announced a joint venture with Houston-based Babcock & Wilcox Power Generation Group, Inc. The deal is expected to add $30 billion to Thermax’s sales by March 2015. Its CEO was quoted as saying: “We no longer need to be a part of any consortium to bid for projects. We will be able to compete with bigger rivals now.”

Joint ventures are in, and if you're not utilizing this powerful tool, chances are your competition is, or will soon be. The trick is knowing when it makes sense to collaborate with your peers on a project. First, consider whether a prospective joint venture partner has an accommodating culture with compatible broader business strategies. Second, don’t overlook the importance of having a carefully drafted legal document (the joint venture agreement) that describes what each party brings to the joint venture in detail. Finally, and more important than the process itself, is the execution of the joint venture—start with a full-fledged joint business plan, including (very important) an exit strategy.

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