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Joint Ventures

NIC Document

Summary

A joint venture is a partnership between two parties for a specific business enterprise in which both parties agree to share in the profits and risks. This guide address the main issues you need to consider when considering forming a joint venture.

In brief

  1. Purpose of a joint venture
  2. Resources
  3. Technology
  4. Territory
  5. How to set up and run a joint venture
  6. Agreement
  7. Control and management
  8. Exit

Introduction

A joint venture is a partnership between two or more groups where they agree to share knowledge, resources and expertise to achieve a defined objective. The risks and rewards of the enterprise are usually shared according to the contribution each party has made to the partnership. All parties will agree the value of each contribution up front and this will be written into the joint venture agreement.

Purpose of a joint venture

There are many reasons for a joint venture, but the main purpose is to achieve a goal that one party would not be able to achieve, or achieve as easily with as much success, without the input of the second party.

Resources

One party may wish to develop or sell a product, but require additional resources in the form of cash, facilities, intellectual property or expertise in a particular field that can be provided by a second party.

Technology

Technology joint ventures can come about in a number of ways. In some cases, putting together two pieces of technology may be necessary to develop a lead in a particular market and a product that has advantages over the competition.

Territory

One of the major reasons for undertaking a joint venture is often to gain access to a territory where a company does not currently have a presence. This is particularly important in countries where foreign companies are either prohibited from operating or have barriers to operating effectively. This type of local expertise can add real value to the potential opportunities in a new territory.

How to set up and run a joint venture

It is important to consider several key issues when creating a new joint venture. These include:

Partner identification

Perhaps the most challenging stage of forming a joint venture is finding and choosing the right partner. In order to form a successful joint venture, both parties will need to commit resources and will be exposed to risks. Differences in ethos, ways of working and management can create problems during the creation and ongoing work of the joint venture. However, there are specialist joint venture brokers who can bring companies together for the advantage of both parties and themselves. With joint venture brokers it is worth remembering that their job is to find partners and not necessarily to assess whether they would work well together. If possible, it is worth making the time and effort to identify potential partners yourself so you can assess whether the joint venture is likely to work. Another approach is to find the right partner through short-listing (if there is more than one) and visiting the leading potential partners, followed by:

  • A decision analysis process – noting down all the requirements between your organisations and producing a score against each requirement which can then be added up to provide a ranking
  • Testing the partners with smaller projects or activities to gain an appreciation of how they work and whether you would be able to work well with them
  • Sometimes there may be few potential partners to choose from. If a particular piece of IP or technology is required, there may only be one company or a handful of companies that can provide it.

    If you do select a partner for a joint venture, you should check a number of issues about their business such as:

  • Are they are financially secure?
  • Do they have any credit problems?
  • Do the management team or directors have any past record of criminal activity or financial irregularity?
  • What skills and experience do the management team have?
  • How is the company currently performing?
  • What do the current customers and suppliers say about the company in terms of reputation and integrity?
  • Do they have the skills and resources that you need?
  • Agreement

    In any kind of commercial arrangement, it is important to set out the legal terms. This agreement should state the structure of the joint venture, the objectives, the contributions from each party and how it will be controlled. The share of profits and losses, dispute resolution, and exit strategy should also be discussed and a process finalised. It is also vitally important to consider and formalise how IP will be dealt with during and after the joint venture. There should be mechanisms in place for the other party to restructure or withdraw from the joint venture agreement in the event of either party being unable to deliver on their promises or going into administration. While both parties will accept liabilities related to the joint venture, they should not be exposed to the other party’s liabilities unless they choose to be.

    Control and management

    For a joint venture to work successfully, you need to be very clear about how it will be controlled. If the joint venture is not the top priority for each company, a separate management structure is probably the best route to progress the project properly. The most important factor in the management of a joint venture is communication, to ensure that all parties are kept informed about progress.

    Exit

    In a joint venture it is important to define what will happen at the end of the project. There are likely to be a number of issues, such as ownership of intellectual property, protection of confidential resources and division of resources and debts. These should all be decided at the start of the agreement, as should the exit route. It may be that one company agrees to buy out the other after certain milestones are met.

    You may also be interested in the following document: Choosing Your Sales Route