There are three ways to grow a company – you can grow organically, acquire a company or partner with another firm. An international joint venture falls into the third category.
Tom Wheeler, managing director of IR Global, a professional services network that provides advice to companies and individuals says there are many reasons why a company might consider entering into an international joint venture with one or more other parties.
He says a firm may do this for three reasons:
- Trying to break into a new market and have need of a partner with local knowledge or contacts.
- Tendering for a demanding project and need the resources, skills and experience offered by another organisation.
- Hoping to grow and scale up its operations quickly and want to share the financial burden and risk with another business with similar objectives.
Whatever the exact reason, a joint venture (JV) can often prove to be the ideal way of achieving a stated goal. Management consultancy Bain & Company carried out a survey of 253 joint ventures between 1995 and 2015, finding that, overall, the value of JVs grew at twice the rate of M&A deals. The US joint ventures they studied, yielded a 17 per cent return on investment, compared with an industry average of 11 per cent.
This all sounds like a strong argument in favour of JVs, but there are significant complexities within this form of collaboration that, if not addressed correctly, can lead to failure.
Wheeler says, ‘The first thing to consider, before any structuring takes place, is due diligence and a thorough assessment of the other partners involved. Often those partners are so excited about bringing synergies together, while sharing knowledge and skills that they forget to think carefully about whether the organisations involved will work well together.’
It is best practice to implement a risk analysis as early as possible, in order to identify potential risks and how to minimise them. A partner-fit assessment is also crucial, based on pre-defined criteria such as decision-making styles, strategic intent and culture. This is particularly relevant if the JV is international with parties from different countries working together.
Once international JV partners have been properly assessed and cultural differences understood, the next consideration is structure.
Tax and the delivery of profit is a major driver of structure, and can influence whether the JV uses a formalised vehicle in another jurisdiction, or an informal contractual arrangement with no new legal entity. Formalising the structure will require JV partners to extract profits across borders and does often involve the use of offshore planning.