Philip AlexanderThursday, 25 August 2011 14:01
Joint Ventures: How to Work Out the Split in a Small Business: Phil Alexander
How do I value my contribution in a joint venture arrangement?
I’m contributing significant know-how to the expansion of our joint venture business, but not cash. How do I value my contribution in a joint venture arrangement?
Your challenge here is one of the most complex and variable in all business structuring.
It is very difficult to value contributions to new businesses when they are not cash.
While there are many cases of failed or litigious JVs, there are also some successful JVs that provide broad insight into how they can work.
The best time to set the terms and conditions of your legal and working relationship with your JV partner is now – before too much expense and time has been invested (and while you are on good terms!).
There are two potential approaches here:
1) If you are not contributing cash but you are going to run the AU franchise network, you need to agree a salary and could build an “equity earn in” structure built around KPIs – launch of stores, revenues, profits and so on.
These KPIs should be reviewed every quarter and the more you achieve the more equity you gain in the JV.
You might start with 20% equity and aim to gain up to 50% within three years.
2) You could start with a 50/50 split in the new JV and have a mechanism to “buy” more equity from the other partner based on either agreed KPIs or cash terms.
In both approaches, any exit clause should give each partner the first right to buy out the other on reasonable terms and valuation.
The key to any successful JV is ensuring that the partners have an aligned strategy, three-year financial forecasts with monthly formal reviews of financial and operational performance, and a clear agreement on roles and responsibilities.
I know this is a generic set of advice but your challenge here is complex and detailed.
Lawyers can create a set of clauses but what will really count is your working relationship, agreed goals and rewards with your partner.
A white board working session between you both could flesh out the issues and lead to broad agreement on KPIs and value.
If you can't agree over a three-hour meeting, you won’t agree during a three year JV!
Philip Alexander is director at Hall Capital Strategies, a corporate advisory firm, and chairman of SEM agency e-channel search. He is also an investor in several media and technology companies in Australia and Asia. http://www.hallcapital.com.au/index.php?page=Team
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