Seth taught me (among many other things) that you can not really
know the value of a business, partnership or JV at the creation of the relationship. What you really need is a test period for
that relationship to determine how wrong you were on your initial assumptions,
who is working hardest to make the partnership work and what the true economics
are. His post on allocating company
equity is a great framework for thinking about a joint venture and has helped me rethink this entire process.
I am currently working on a few JV relationships for clients. One California company that provides IRS tax lien help and a NYC company that provides creative business financing to small companies provides a perfect example. The financing company declines dozens of applications every month because of tax liens, perfect prospects for the tax relief company. As we start the relationship though, there are more questions then answers and there is a low level of trust between CEO’s because the companies are just getting familiar with each other.
I’ve seen many potential deals like this die in the legal department because companies are worried about making a long term commitment to people they do not know and with terms they are unsure of. The solution is a “venture test”.
We created a very simple 60 day agreement that automatically terminates. That makes every decision a relatively small one because the agreement terminates in 60 days. At that point, if there revenue opportunity is significant enough; you can have a much more meaningful conversation based on real statistics.
This is a very simple idea, but it helps to eliminate much of the risk of creating a JV for both participants. It is also much less expensive and less complicated to document this type of arrangement.
Joint Ventures hold great opportunity for most businesses to leverage their best capabilities. “Venture testing” allows for many potential relationships and a self selection process that will allow you to focus on the ones that hold the most promise.