This article provides an overview of the main ways in which you can set up a Joint Venture, the advantages and disadvantages of doing so, what to look for in a joint venture partner and how to make it work.
What is a Joint Venture?
A Joint Venture is a contractual arrangement joining together two or more parties for the purpose of executing a particular business undertaking.
Why should you consider entering into a Joint Venture?
The reasons behind forming a Joint Venture can be varied. Generally speaking, a company enters into a joint venture because it lacks the required knowledge, technology or access to a specific market that is necessary to be successful in pursuing the project on its own. For example, you might want to enter into a Joint Venture because you do not have enough resources to pursue your business opportunity individually, or because the commercial partner you would like to work with owns the Know-how you need to make the Venture works. Moreover, it could be simply that you are unsure about the success of your project, and therefore you aim to share the risks and costs with another commercial partner.
The choice of the Joint Venture Partner
The right business partner in a joint venture is someone who has resources, skills and assets that complement your own. It is advisable to look for a partner among the existing customers and supplier you already have a long relationship with, and only after doing so, you should think about your competitors or other professionals. As example, the ideal partner you might look for is a company with a distribution network through which you can market your product, as well as a company with a lack of economic resources to exploit its intellectual property.
What are the main issues that need to be faced with a joint venture partner throughout the negotiation of the arrangement?
Main Issues to be considered include:
- Choice of the vehicle.
- Business plan
- Scope of the Joint Venture.
- Financing – How will be financed the Joint Venture?
- Management – Which party will provide day to day operational fuctions?
- Establishing a lock in period during which the partners have agreed that a voluntary dissociation should be unavailable
- Duration – Generally the ideal term of a JV is 3 years.
- Confidentiality – By signing a confidentiality agreement a party undertakes not to disclose your confidential information it learn in the course of negotiations, nor use it to your detriment.
- Sharing profits
- Intellectual Property – who will own the IP generated by the JV
- Disputes – how any disputes between the joint venture partners will be handled
- Exit mechanisms and Termination
Structure types of a Joint Venture
- contractual agreements – the parties agree to associate as independent contractor. Contractual agreements have the simplest structure and are generally chosen by parties for project-based. Through the agreement the parties should balance their economic interests and spell out the details of the purpose as well as any other single detail related to the project. The agreement should be very specific in outlining each party’s duties and rights under the agreement, taking into account that all parties are entitled to share in the profits as well as the losses incurred in the venture.
- forming an unlimited liability partnership or a limited liability partnership. Unlike the unlimited partnership, which requires participants to abide by statutory obligations toward each other and third parties, the limited liability partnership must consist of one or more general partners with full liability and one or more limited partners who are not liable beyond the amount they have contributed to the partnership.
- Joint Venture Company – as a separate legal entity, the JV Company can own and deal in assets, sue and be suited and contract in its own right. Over the last years many famous Companies have decided of doing so, including, but not limited to: Nokia, Fiat, Microsoft, Jaguar and so on. A list of the most famous Joint Venture Companies can be viewed by clicking here.
The benefits of joint ventures
Forming a joint venture has unique benefits that make it an attractive option for some businesses. The main advantageous are:
- It can surely enable businesses to foster their international development by having access to new markets and distribution networks.
- It will give you access to better resources, such as specialized staff, technology and finance.
- Shared risks and costs. That means that your are not alone in case the joint-group project fails, therefore you will support the losses with your partner.
- It can give you the chance to gain intellectual property, technology or other resources that are often difficult to build in-house.
- Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business’ exposure.
- Enhanced credibility: by entering into a JV with a well know brand, small business, as well startups, can increase their market credibility and thus a strong customer base.
- Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.
The risks of joint ventures
Before you consider signing up to a joint venture, it’s important to understand that the success in a JV depends on thorough analysis of mutual aims and objectives. Therefore issues are likely to arise if:
- an in-depth due diligence (including legal) has not been carried out;
- the partners do not establish an adequate lock in period. During this period the parties should put efforts to make the Venture properly works and avoid breaking up the arrangement;
- the scope of the Joint Venture is not totally clear and communicated to everyone involved
- there is not a clear agreement on the ownership of any new intellectual property created by the joint venture. As such, you should always take into account what will happen if the joint venture modifies your intellectual property.
- there is not a plan for the termination.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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Davide Palazzo – Palazzo Law Boutique