Choosing the right partner ultimately may determine the success or failure of an international joint venture. In the article below, “Court Your Equal: Selecting a Partner for an International Joint Venture,” FOCUS Principal Brad Fleisher draws upon his expertise in cross-border European transactions.

Brad is an experienced entrepreneur and attorney with over twelve years of international corporate and business development experience with finance, healthcare, consumer technology, and radio broadcast companies. From 1994 through 1998, he was in-house Counsel for Eastbrokers International (Nasdaq: EAST), a Central European Investment Bank. Brad also co-founded and served as Executive Vice President of Spectrum Europe, an Eastbrokers spin-off that invested in radio stations located in Western and Central Europe.

Prior to joining FOCUS, Brad founded and served as President of Adlego Solutions, a healthcare consulting firm offering HIPAA regulatory compliance to healthcare providers.

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Active FOCUS Deals

Although our firm has over 22 years experience across many verticals, FOCUS currently has active transaction engagements in the following specific business sectors:

• Business Services
• Call Center Software
• Construction (multiple assignments)
• Consulting
• Digital Printing Services
• Government contracting (multiple assignments)
• Healthcare Business Services
• Information Management
• IT Outsourcing (multiple assignments)
• IT Services (multiple assignments)
• Leisure
• Library Services
• Media
• RFID Technology
• Security (multiple assignments)
• Software

Our transaction process provides us with up-to-the-minute market knowledge in these sectors that may be corporate development of interest to you.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-785-9404, x 341 or by fax to 202-785-9413.

Court Your Equal: Selecting a Partner for an International Joint Venture

By Brad Fleisher, FOCUS Principal

The first phase of an international strategy for small and medium size businesses often consists of setting up sales agents and distributors or arranging licensing agreements. These strategies are good for testing the waters and augmenting revenue, but many firms eventually conclude that to make their international efforts worthwhile, a more serious commitment is required.

Characteristics of Appropriate Joint Venture Partners

This commitment can take many forms, from franchising to acquiring a company to making a greenfield investment. One alternative that generally falls midway between agency and greenfield is the joint venture. More than just a strategic alliance, the joint venture alternative can significantly increase revenue and market share while spreading costs and sharing risks. The search for a joint venture partner should begin by courting firms that bring not only equal value to the table but equal fundamentals to the relationship.

Joint Venture Partners Should Contribute Nearly Equal Amounts of Capital

Let's begin with equal capital contributions. All businesses need capital in order to conduct operations. (For purposes of this article, a joint venture is considered to be a separate legal entity; that is, a company, partnership, or one of the various legal entities that limit liability. Joint ventures can be purely contractual, but these are often formed for one-off or short-term transactions and can be considered a strategic alliance.)

Without making too much of an issue of relative currency fluctuations, cold hard cash, by definition, is easy to value. Both parties (or all parties if there is more than one joint venture partner) should contribute nearly equivalent amounts of cash even if ownership of the new entity is not split 50/50.

Cash contributions are significantly more valuable than the “stated value” of in-kind contributions. Not only is the cash liquid, but it also represents the ability of that firm to sell products or services in their market place. Partners that have earned their cash will feel its loss more acutely than a sweat equity contribution. A cash contribution further assures that all parties work hard not to lose their money, oftentimes a more powerful incentive than working to assure the success of the project.

Valuing In-Kind Contributions Is More Complicated

Next, in-kind contributions come in many forms ranging from market knowledge and relationships to allocation of employee time to intellectual property. Just by having a company on your list of potential suitors means you value their in-kind contribution to the relationship. The issue then is not what they bring to the table but how that contribution is valued, a vague and fluid proposition that is likely to vary in different countries and even within different markets of the same country.

For example, your firm may value a firm’s proven competence to market consumer products through a distribution channel. This contribution is more valuable in China than in England due to the size and growth of the market, barriers to distribution in lesser developed economies, potential product margins, and lack of competitive alternatives. The converse is true if you intend to sell luxury products where brand recognition is meaningful. The English partner’s in-kind contribution of luxury product distribution is likely to be more valuable in the upper scale European market.

There Is No Substitute for Crunching the Numbers

The best way to reasonably value your prospective partner’s in-kind contribution is to do your homework. First, determine the value of the contribution as it relates to your firm by running a spreadsheet analysis on market share, margins, investment horizon, and other critical variables. There is no substitute for crunching the numbers.

Next, determine the value of the in-kind contribution within that specific market place. There may be more than one potential partner that can bring the key competency to the relationship at similar prices. There is no substitute for due diligence. You should court various partners to determine value in the marketplace the same way you would seek comparable values if you were buying a house.

Size May Matter in International Joint Ventures

Not surprisingly though, equal contributions are not the same as an equal partnership. It may be prestigious to collaborate with a multi-national, publicly recognized market leader but it may not be the best partner for your international venture. The multi-national’s heft and authority cuts both ways. A one million dollar investment will not carry the same weight and commitment with a large company as the same investment with a small or medium size company.

A significantly more dominant company can walk away from the venture if it doesn't meet expectations. It also will be easier to force the smaller firm out and not share profits if the venture goes better than expected. Conversely, there are concerns if you are the large company in the relationship. What if the venture requires more resources than initially planned? Can the small company scale or manage rapid growth in a foreign market? What happens if the small firm begins to experience a downturn in its domestic revenue?

Deal Structure and Contracts Should Tighten an Already Equal Relationship

When you are evaluating suitors for an international joint venture, take into consideration the size of the company, its market share, its willingness to commit comparable intrinsic value, reputation, etc. Even if you already have an established relationship with your prospective partner, considering other partners is still a valuable exercise. Finding just one feasible alternative may improve your negotiating position.

Does all this mean that you should not endeavor into foreign markets unless you have an equal partner? Of course not. There may be different structures that are more appropriate for unequally paired companies. The point is that you should not seek to massage an unequal relationship into an “equalizing” or “neutralizing” deal structure.

Instead, your deal structure and contracts should tighten an already equal relationship. Choosing the right partner is the best protection for your investment and ultimately determines the success or failure of your international endeavor.

This article originally appeared in the December 2004 issue of "Beyond Virginia," the newsletter for the state of Virginia's Economic Development Partnership, Division of International Trade. Brad can be reached at brad.fleisher@focusbankers.com or at 202.785.9404 x223.

FOCUS Offices in Atlanta and San Francisco Expand: G. Huxley Nixon, William O. Inman, and Douglas Hosking Join as Partners

Three new FOCUS Partners, G. Huxley Nixon, Jr., William O. Inman, and Douglas Hosking, are joining the firm’s growing Atlanta and San Francisco offices. With the addition of Huxley Nixon and Bill Inman, the Atlanta Office now has five Partners plus a Senior Advisor. Douglas Hosking brings the total number of FOCUS Partners in San Francisco to four. Both Atlanta and San Francisco FOCUS Offices are actively recruiting additional Partners to support growing investment banking activities.

G. Huxley Nixon, Jr.

Based in Atlanta, FOCUS Partner Huxley Nixon is a seasoned executive with over twenty-five years in financial services. Most recently, Mr. Nixon founded Concord Hill Capital, a successful Atlanta boutique investment banking firm specializing in M&A transactions and private placement of debt and equity for early stage and small companies. Concord Hill completed over 30 engagements in a variety of industries including Telecommunications, Technology, Manufacturing, Biotechnology/Life Science, and eCommerce. Prior to founding Concord Hill, Mr. Nixon served as co-founder and Executive Vice President of Leasing Operations and …more

William O. "Bill" Inman

Also working with the firm’s Atlanta office, FOCUS Partner Bill Inman is a twenty-six year veteran of the merger and acquisition advisory business, personally serving as an advisor to hundreds of public and private companies in the retail, wholesale, distribution, manufacturing, software, food service, logistics, and personal service industries. Most recently, he served as Chairman of The Inman Company, a boutique merchant banking firm he founded in 1996. In addition to merger and acquisition advisory work, Mr. Inman has assisted many early stage companies in raising capital...more

Douglas Hosking

Based in San Francisco, Douglas Hosking, a FOCUS Partner, has more than 20 years of business experience including business and strategy development, operations management, and implementation. His career has spanned the consumer, financial services, and technology markets. Previously, Mr. Hosking served as President of IPC Communication Services, a $130 million multinational manufacturing and logistics organization providing services to the software PC OEM and hardware industries. There he developed integrated solutions…more

RECOMMENDED READING: New Business Week Article Cites Key Trend Favoring Middle Market Transactions

The February 21, 2005 issue of Business Week includes a two-page analysis of emerging M&A strategies entitled “Have Dealmakers Wised Up?” The article identifies four trends in larger company M&A activity, one of which boosts the potential for middle market transactions.

That trend is “stay close to home,” which translates into smaller acquisitions in current core markets, rather than large acquisitions in new markets. It has been noted elsewhere that many of the most successful acquirers tend to “stick to their knitting,” doing a steady stream of smaller deals in their core markets. Some also do smaller deals that allow them to enter adjacent markets.

The article appears on pages 36-37 of the February 21st issue. Here is a link to the complete article on the Business Week Website: http://www.businessweek.com/magazine/content/05_08/b3921038_mz011.htm

FOCUS Web Watch: DEALS

You will find excellent intelligence about the full complement of FOCUS transactions in the section called DEALS in the newly-designed Website (www.focusenterprises.com). In the red navigation bar at the top of the Home Page, the link to DEALS is located third from the left. It will lead you directly to up-to-date information on the following:

• Business Sector Experience--lists the full spectrum of FOCUS sector expertise.
• Current Deals--updated monthly, this section lists currently active market sectors.
• Tombstones: Merger, Acquisition, and Divestiture--includes a summary of all Publicly Announced Deals complete with company information for all deals and Tombstone PDFs for most listed deals.
• Tombstones: Corporate Finance--includes a summary of all Publicly Announced Corporate Finance Deals complete with company information for all deals and Tombstone PDFs for most listed deals.
  

About FOCUS Enterprises, Inc.

Headquartered in Washington DC, with offices in Atlanta, Chicago and San Francisco, FOCUS provides a range of investment banking services tailored to the needs of emerging growth, middle-market and small companies. FOCUS specializes in transactions for entities with $5 to $100 million in revenues, serving entrepreneurs, corporate owners, public companies, private companies or operating units and various types of investors.

For 23 years, FOCUS has successfully integrated corporate development consulting and transactional expertise with its extensive research capability. The firm has long standing experience in completing mergers, acquisitions, divestitures, capital formation assignments, corporate development consulting projects and financial advisory engagements.

Operating nationally and internationally, twenty FOCUS Partners, Senior Advisors and Principals provide over two centuries of C-level operating experience in a variety of industries.

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