Philip Zanfagna is a Business Analyst, Molly Farber is former Managing Director, and James Bamford is a Senior Managing Director at Water Street Partners. This post is based on their Water Street Partners memorandum.
When companies decide to pursue a joint venture (JV), a critical first step is determining the appropriate level of ownership and control. Given a choice, most companies would prefer to be the majority partner, believing such a structure provides greater control and decision-making efficiency. Being a minority partner, however, is also appealing in certain cases by limiting capital outlays, reducing operating responsibility and resource demands, lowering risk exposures, and keeping the JV off of the company’s consolidated financials. [1] A third option is a 50:50 joint venture.
There are a number of factors that might drive JV partners to an equal equity split. Most simply, such structures reflect the partners making equivalent cash and non-cash contributions to the venture upon formation. Beyond this, equal ownership might be a function of regulatory requirements for local partners to hold at least a 50% ownership stake, or a reflection of neither party wanting to consolidate the venture’s financials. The choice of 50:50 is often the default practical solution for partners when contributions are roughly equal and neither is willing to cede control. Or, companies may favor 50:50 ownership due to a desire to build an independent, long-term sustainable business based on balanced contributions, risks, and rewards between complementary partners.
