There are many ways a business may obtain a strategic advantage without entering into a full M&A deal. Below we review a few of the most common arrangements: Joint Ventures, licensing, exclusivity and subcontracting.
Joint Ventures: Partnering for Specific Projects
A joint venture (JV) is a contractual relationship between two or more parties to carry out a business venture together. It is usually a partnership for a particular project—not forever. Sometimes profits are split between the parties, sometimes revenues. In a cost-sharing arrangement, revenues are typically shared in the same ratio as costs are incurred.
- Pros of a JV:
- Bigger Scale: A JV can help the parties carry out a larger venture together than they can do individually. More resources, finance and expertise can be deployed.
- Expansion: It can be a useful way of expanding into new markets or sectors.
- Less Finance Needed: No party is buying any other party. If each party puts up part of the finance needed, this is more comfortable and less risky than financing the entire venture alone.
- Cons of a JV:
- High Failure Rate: Many JVs ultimately fail, perhaps more than half.
- Less Control: A JV committee with representatives from each party typically manages the JV. No one party controls things. A consensus is usually needed which isn’t easy.
- Risks: Because no one party is in control, there is often a risk of failure to act. In some JVs one party has used the arrangement to steal knowhow or other intellectual property (IP).
A JV may enable the parties to achieve more, but they can be riskier than in-house operations. Advisors.biz can help structure and account for such an arrangement.
Licensing: Monetizing Intellectual Property
Licensing is when knowhow or software is licensed to others in return for a royalty – usually a percentage of resulting sales revenues.
- Pros of Licensing:
- Easy Expansion: Licensees gain easy access to the IP concerned.
- Low Financial Barrier: The IP is essentially bought in and financed out of sales revenues. No need for the licensee to fund R&D.
- Cons of Licensing:
- No Control: The licensee has no control over the future R&D of the intellectual property.
- Tax Issues: Royalty withholding tax is often required if the licensor and licensee are in different countries.
Licensing is most relevant to IP supply deals, not low-tech physical products. Advisors.biz can help structure and account for such an arrangement.
Exclusivity Deals: Locking in a Competitive Edge
Exclusive supply arrangements are a way for a customer to purchase something and shut out competitors.
- Pros: If the supplier grants exclusivity to a strong customer, this may leverage the customer’s greater marketing ability. Neither party is buying the other, so less financing is required.
- Cons: Neither party owns the other, so much depends on the terms of the agreement. There is a greater risk of misunderstandings and cultural differences.
An exclusive supply deal may be cheaper than an acquisition and is worth considering if the agreement is well-drafted and there is a “meeting of the minds.” Advisors.biz can help structure and account for such an arrangement.
Subcontracting
Subcontract agreements are common in the business world. Typically, the subcontractor is hungry for the work, which gives the prime contractor a degree of influence and flexibility without the need for a formal partnership. Advisors.biz can help structure and account for such an arrangement.
Path to International Expansion
We at Advisors.biz want you to choose your own way of expanding your business internationally. We can suggest possibilities and present the pros and cons of each.
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