When engaging independent physician practices in strategic planning as well as succession planning, the topic of joint ventures may emerge. You might have a killer idea, but lack the resources, finance or specific knowledge skill set to deliver it. With the strong competitive forces in many areas, physicians sometimes contemplate a joint venture with another organization such as a hospital as a means to protect their practice without selling out entirely. Sometimes, collaborating with another business that is able to plug the gap can be the way forward, giving you credibility as you move into a new area.
What is a Joint Venture?
A joint venture involves two or more businesses (medical practices, hospitals, or management companies) entering a formal agreement for a particular business project or undertaking. The ability to create synergy with another company through shared expertise is a primary benefit while overcoming cultural and communications barriers are key drawbacks.
With a joint venture, a particular party may opt to disengage from the venture but remain steadfast in operating its own business. Primary challenges, however, center on problems with leaders agreeing on the best strategic plans for the venture. Also, when two organizations with different cultures and values combine for a single venture, natural barriers to cooperation and communication exist. To avoid having these barriers impede success, the parties should perform due diligence to ensure adequate alignment prior to entering the venture.
There are of course many details to study when beginning to think about such an endeavor. Joint ventures are complex relationships and take many different forms. They also need careful planning to make them work. Moreover, the challenges and opportunities are unique to each market so you must not view a potential joint venture through the lens of what may be occurring elsewhere. Broadly speaking though, there are some advantages and disadvantages to consider when weighing the prospect of entering into a joint venture with another entity.
There can be significant advantages in creating a joint venture. Some benefits include:
- The ability to collaborate with other partners when making business decisions.
- Entering related businesses that previously presented high barriers to entry.
- Gaining access to expertise without the need to hire more staff.
- Sharing the financial responsibility of capitalizing the business.
- The parties can share risks and costs.
- Leveraging existing technologies used by the other organization.
- Establishing a presence in new, untapped markets.
- It is only a temporary arrangement between the parties.
- The parties have access to additional resources as they are coming together for a mutual and specific goal.
- The parties can complete a project which they may not have had the finances or staff to complete on their own.
- Increasing opportunities for growth of your business including financial growth.
There can be, however, some pitfalls of entering into a joint venture. Some disadvantages include:
- Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal.
- Coping with differing cultures, management styles, and working relationships that prevail in each organization.
- Managing communication with physicians, senior managers and employees in both organizations so there’s a consistent understanding of the objectives of the joint venture.
- Either of the parties making poor tactical decisions which may affect the desired outcome of the project. These are usually caused by a misunderstanding of the roles of each organization.
- Lack of commitment to the project by any of the parties.
- There are times when flexibility is restricted.
Plausibility alone is not enough
Forming a joint venture with another healthcare organization may be seen as a plausible solution. The success of a joint venture though highly depends on thorough research and analysis of the objectives. There really is no such thing as an equal involvement and a variety of management structures is possible.
Because different entities are working together, there is a great imbalance of expertise, assets, and investment. A joint venture might gain you access to new geographic markets or at a minimum expand your patient base. A joint venture can also serve to fund growth and new technologies. The success of a joint venture, though, increases when there is a common goal, clear communication between all parties, shared/reduced costs, and an obvious upside to all of the partners involved. If the pros outweigh the cons, execute a crystal clear joint venture operating agreement from the beginning to ensure success.
A joint venture could make sense if you have identified a high potential marketplace and a good prospect partner, or if local markets require one. However, to partner effectively you must be able to balance risk vs. control. Additionally, you must consider whether you can afford to provide the necessary capital and internal and external resources.
Nick Hernandez, MBA, FACHE
Nick Hernandez, MBA, FACHE is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives.
Since founding ABISA in 2007, his emphasis has been on developing and maintaining a strong relationship with physicians and identifying areas for business opportunity and support. The company’s client list includes physician groups, hospital systems, healthcare IT organizations, venture capitalists, private equity firms, and hedge fund managers.
Nick is a graduate of the United States Naval Academy and a former Captain in the U.S. Marine Corps. He holds MBA degrees in both Operations Management and Information Technology & E-Business Management from Wake Forest University. He is Board Certified in Healthcare Management and has been named a Fellow of the American College of Healthcare Executives.
He is a frequent guest lecturer and is often quoted in the national media. He has consulted with clients in multiple countries and has over 20 years of leadership and operations experience. Nick is a Subject Matter Expert in business strategy, practice management, telemedicine, health IT, and oncology.
This is an excellent introduction to joint ventures. That said, having served as counsel to many JVs and JV partners, I would add that one of the most important and frequently neglected aspects of the JV is the eventual termination. In my experience, every joint venture will ultimately either get broken up or bought out by one of the venturers. The partners can provide for a smooth termination through careful negotiation at the outset, or they can buy themselves what will likely be a protracted and often acrimonious negotiation at the end. I generally think the first option is better.
Hi Mitchell, if a clinic business owner wants to set up a speciality foot+ankle center in a larger hospital, what things should he/she think about with regards to exit strategy.
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