I don’t have to tell you that the pandemic decimated the income streams of so many businesses. And in the mad scramble to keep money coming in, you might have encountered or heard increasing use of an old term. Joint Ventures. As in, let’s do a joint venture together and find us some money.
Today, let’s clarify what a Joint Venture is. And maybe save you from being burned.
The old fashioned, been around forever definition of a Joint Venture (JV)
Is a business arrangement in which two or more parties agree to pool their resources to accomplish a specific task. This task can be a new project or any other business activity.
The terms of a JV are written out and signed off. Each of the participants is responsible for the profits, losses, and costs associated with it. In an agreed-upon proportion.
Plus, the venture is its own entity, separate from the participants’ other business interests. This means all JV transactions need to be recorded separately from the base business.
Years ago, I led the financial and administrative functions of a JV agreement. It was between my employer and a company in China. We were anxious to establish an Asian presence. Given the way the country operated, we knew we needed help to enter the market.
We formed a legal agreement with a local Chinese company. It had the sales force, the contacts, the connections, a local office and the credibility of already operating within the Chinese culture.
We struck a deal – with a 75% stake for us. We did this because we invested all the cash, parachuted in our excellent product line complete with marketing collateral, and were paranoid about losing control.
Referral fees or finders fees have been around forever.
The basic premise is a commission is paid. To the person or entity that facilitated the deal. In other words, they or it introduced and linked up a potential customer with an opportunity. It is both a reward and an incentive to motivate the transaction facilitator to keep providing referrals to the buyer or seller in the deal.
Over the years, I have seen these kinds of fees paid in acquisitions, in contracts of significant size and, more recently, in regular sales transactions involving non-traditional sales methods.
In the online world, you will hear something called —
An affiliate marketing fee (AMF)
The AMF is an arrangement by which an online retailer pays a commission to an external website for traffic or sales generated from its referrals. Because the online world pre-COVID was predominantly digital products, the AMF was often between 35% and 75% of the revenue.
Today the term joint venture is being used more casually.
Typically it is used for attractive sales deals between two or three parties. As in, “Give me at least 25% of the sales dollars you make when I introduce your product to my contacts or mailing list, and they buy. I’ll talk you up, and when they buy, you pay me.” The best line I hear is, “Give me 50% or even 100% of the revenue! Your cost of acquisition is negligible when you compare it to the amount of money you will earn from the lifetime of this client.”
This is not a joint venture arrangement.
It is a costly marketing ploy. Which means it falls into the category of referrals, finders and affiliate marketing fees.
With PPE being in short supply this year, there is an underground economy of people pooling their resources and trying to source the best quality PPE for large contracts. In many cases, they call themselves a JV because they are working together to source the product and factoring in a percentage fee or cut off the ultimate contract.
Sadly, this is NOT a joint venture.
It is an informal purchasing consortium. Solely organized to buy stuff, skim off a piece of the revenue and share said revenue amongst the parties.
If you take part in a JV where you provide —
- the product,
- the marketing material,
- a system to collect names of both the prospects and the person who refers for you, AND,
- you agree to reimburse anywhere between 1% and 100% of your revenues to the person who exposes your products/services to their network base
–please know you are entering into a different kind of marketing arrangement. Be sure you can afford the more than 25% it will cost you to acquire that customer. (Far too many businesses can not!)
Arm yourself with some key facts
In general, most businesses have marketing costs (as a % of their revenues) somewhere between 5% and 10%. AND those same businesses have selling expenses (labour, travel and perhaps entertainment) in the range of between 10% and 25% of their revenues. Depending on where YOUR company ratios sit, the sales and marketing expense you pay for the privilege of being part of these new business dealings will be 5% to 45%. Sometimes even more. As a % of your total revenues.
To my mind, anything more than 10% of revenues will take a substantial bite out of your net profit. Be very clear about what and why you are doing this. Lessen your downside with some written performance guarantees.
If you want to understand how strong the JV arrangement is, ask one question to the other parties. “What are YOU putting into the mix?” If the answer is some variation of, “I introduce you to my network,” stop and think. How much time, energy and money do you need to make to have this deal payoff in your terms? Can you afford to put in that time, energy and money?
Don’t get me wrong.
I have no problem paying for commissions, referral fees, finder fees, introductions and such. And there is NOTHING wrong if those fees need to be called something different. Some industries are heavily regulated.
But changing the definition of an ancient transaction to make something sound sexy is dangerous for YOU and your business. Please be careful about the deals you go into. A pig is always a pig – no matter how much lipstick is applied.
Want to chat about boosting your own revenues and profits? Call me.