What CFOs need to know about joint ventures and alliances

As businesses clamor to address the challenges of growth, they’ve contributed to expansion of another kind: an increase in joint ventures (JVs) and strategic alliances.

The phenomenon is examined close up in a recent report from PwC, Joint Ventures and Strategic Alliances: Examining the Keys to Success. Citing data from its 19th annual 2016 Global CEO Survey, PwC found that 59% of U.S. CEOs plan to initiate a strategic alliance in the next 12 months—an increase of 15% from 2015. On a related note, M&As are taking off, too: 2015’s global record high surpassed $5 trillion, according to the Harvard Law School Forum on Corporate Governance and Financial Regulation.

“Alliances and joint ventures have always been in the toolkit of a CFO,” said Nigel Smith, PwC Deals principal, based in New York City. “At the moment, companies are searching for growth, confronting new technology in the way they operate—and they need to move at speed. So all eyes are looking at every tool at their disposal.”

Strategic alliances are agreements between two or more organizations to share resources or knowledge to pursue mutually beneficial outcomes, with each party remaining independent. In a JV, businesses take the bigger step of pooling resources to create a new business entity or company. Thus, “There’s more flexibility with an alliance than with a joint venture, depending on how you structure it,” Smith said. “And they can be for a short period of time—whereas a merger and acquisition is forever.”

So what do CFOs need to think about and plan for before their organization enters a JV or alliance? Here are a few things experts say should be considered.

Find capable leaders

First, when CFOs find themselves in an alliance-JV scenario, their ability to present a road map with clearly defined signposts and goals will make all the difference. Also, as CFOs help forge a JV effort or entity that stands apart from their organization, job one is tapping leaders who stand apart as well.

“As organizations consider a JV or alliance, it’s very important that a leader is identified early on,” said Jim Szakacs, CPA, the CFO of TayganPoint Consulting Group, based in Washington Crossing, Pa. “That leader needs to think like an entrepreneur who may have limited resources but knows how to design a path forward: a strong collaborator exceptional at communicating across multiple levels, verticals, and organizations.” “That leader,” he added, “needs to wake up each day thinking about the success of the JV and not just the success of their own organization.”

“No one can successfully execute a JV or alliance partner program without first putting a strategic plan in place,” Szakacs said, adding that the plan must not only identify the target goals, but also quantify how success will be measured.

Alliances and JVs can also bring together parties that seem oceans apart even if they have offices on the same street. “You may have a public company and a private company, and understanding all the structural and cultural differences takes time,” Smith said. “You have to start drilling down to what your alliance looks like, what the roles of managers will be, and what the reporting structures will look like. All of that needs to be thrashed through.”

Build trust, stress communication

In addition to alignment around strategic goals, trust and communication are critical. “You have to have trust around that partner—and I can’t stress that enough,” Smith said.

But other crucial issues must be addressed to create that trust. With JVs and alliances, for example, trust hinges in large part on the parties working to harmonize their cultures, said Lars Sudmann, former CFO of Procter & Gamble Belgium and now managing partner at his consulting firm Sudmann & Co., based in the Brussels area.

“Often, cultural matters have a soft ring to them; in the boardroom and spreadsheet analysis, these are seen as irrelevant and that people should just ‘get their act together,’” Sudmann said.  “However, these matters fast become hard issues when JV collaborators do not trust each other, hide data, stall decision-making, and so forth. But by then it is too late to proactively address the matters.”

Then there are cultural concerns of another kind—the opportunities JVs offer for companies eager to test the waters of international expansion. “A joint venture may be beneficial for a new market entrant, especially a foreign venture with a host country owner who has knowledge of the local laws and business environment,” said Shulem Rosenbaum, CPA, a senior accountant at Roth & Co. LLP and adjunct instructor in the Business and Accounting department at Touro College in New York City.

“Collectively, you have to agree on what is the code of conduct, what is the strategy, how are we going to monitor ongoing performance, and when and how are we going to discontinue and break this thing up?” Smith said. “And that creates a whole other level of complexity than when you buy a company and get to dictate the rules of the road right from the close.”

Splitting profits

As for how profits will be split, “Every situation is different,” Smith said, though elements of the equation are easy to isolate. The PwC report emphasizes that due diligence in advance on a number of factors, ranging from how costs are divided to the taxation burden on each parent entity, will help determine an equitable profit distribution.

If all goes well and the JV or alliance achieves its goals, it then comes down to agreeing on how to break apart, Smith said. Just as with forming the effort, parties must proceed with deliberation and care. But if strong bonds of trust, cooperation, and communication have marked the JV or alliance from the start, then it substantially increases the chances that breaking up is easy to do.

Lou Carlozo is a freelance writer based in Chicago. To comment on this story, contact Chris Baysden, senior manager of newsletters at the AICPA.