Beware of 50/50 joint ventures. They pretend to represent “equal partnerships,” but in my experience are anything but equal.
Equal?
Equal doesn’t work when it comes to business dealings. Equal leaves everyone and no one in charge. Supposed equality leaves a vacuum that searches for someone or something to fill it.
If you leave it to chance, odds are pretty good that won’t be you or your interests that win.
What Matters
Above all else, relationships matter. When the joint venture is proposed, ask yourself to whom the senior managers of the entity will owe their allegiances. If the answer is “to me,” then you’re already well on your way to controlling your “equal partnership.” If those key execs don’t come from your organization, don’t owe you a deep debt of loyalty, and aren’t dependent on you for their future, then you should have serious doubts.
Proximity matters. Who is going to visit the JV on a regular basis? When loyalties are divided, the “squeaky wheel” does get most of the grease. It’s human nature. When given a choice between disappointing the people they’ll see tomorrow versus the people they’ll see in three months, the vast majority of hired guns will take care of the short term issue – satisfying the visiting party – first.
Culture is critical. If the proposed JV is embedded in the partner’s culture, they have an automatic upper hand in dealing with employees of the entity. They will understand what drives the employees, how to appeal to them, and how to satisfy them better than outsiders.
What Doesn’t
A casting vote on the board of directors, however, doesn’t do anything for you when it comes to controlling the entity. During my career, I was involved in a couple of 50/50 JV’s where my company ostensibly had control of the company through a board casting vote. While this might be a clever way to make sure you can consolidate the financials, it does virtually nothing to help you exert control over day-to-day operations. Why? Because by the time an issue has reached the point where the board is deadlocked and a casting vote is needed, things have already deteriorated to the point of disaster.
Examples
I used the 50/50 with a casting vote structure to manage a small distributor in a distant location in the United States. Our partners in the JV were the managing executives of the company (remember relationships and proximity – neither in my favor). It took little time for me to realize that our partners did pretty much whatever they wanted, and attempted to pacify my team any time we visited or held a board meeting. Getting the partner to implement things that were important to my employer was virtually impossible. First, they would resist. If we were persistent enough, they eventually made a token effort that inevitably failed – along with lots of excuses, and explanation for why it was a “bad idea” in the first place.
Eventually, performance in the JV deteriorated, and it became necessary to remove one of the partners as President. The result was an unmitigated disaster, which included a series of accounting revelations that weren’t for the faint of heart, the loss of key employees, and the uncovering of all manner of sloppy management practices.
In another JV, this one in China, my 50/50 partner – one located very near to the location of the JV – continually sowed seeds of discontent with the employees while advancing their own agenda. The bulk of the management team came from their organization, giving the partner great advantage through relationship, proximity, and culture.
Unfortunately, commercial success wasn’t the partner’s highest priority (alas, their goal was the self-promotion of a handful of their executives). We ended up wasting human and financial resources building an expensive headquarters building rather than focusing on building sales. No matter how much I tried to emphasize the need to work on sales and marketing, little happened. Not surprisingly, the key managers were eventually reabsorbed into the partner’s organization as things moved from bad to worse. Ultimately, the JV was wound down with little to show for five years of effort.
Conclusion
Partnerships are never, and cannot ever be, evenly balanced. One partner will always end up as the primary driver of the JV, although sometimes it can be the partner with the smaller percentage ownership if other factors are tilted in their favor.
Be realistic about your JV and how it will be operated. Look for as close of alignment between your objectives and those your potential partner as possible. If you are not realistically going to be in control, make sure your ownership percentage reflects that reality.
If you do plan to be in control, the deck needs to be firmly stacked in your favor. The more factors that exist allowing your partner to influence day-to-day management of the business, the more compensating ownership and other means of control you will need.
Finally, don’t be afraid to walk away from the Joint Venture before it is signed. Better to back away than to live for years with a problematic partnership that saps your resources. 25.2
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If you are intrigued by the ideas presented in my blog posts, check out some of my other writing. Novels: LEVERAGE, INCENTIVIZE, DELIVERABLES and HEIR APPARENT. Coming soon -- PURSUING OTHER OPPORTUNITIES
Non-Fiction: NAVIGATING CORPORATE POLITICS
To the right is the cover for INCENTIVIZE. This novel is about a U.S. based mining company, and criminal activity that the protagonist (a woman by the name of Julia McCoy) uncovers at the firm's Ethiopian subsidiary. Her discover sets in motion a series of events that include, kidnapping, murder, and terrorism in the Horn of Africa.
My novels are based on extensions of 27 years of personal experiences as a senior manager in public corporations.
