What You Need to Know Before You Enter Into a Joint Venture
The advantages of joint venturing
Joint ventures are much more common in today's business world as companies strive to gain access to new world markets and improve their profit margins in the face of increasing costs and the need to comply with rapidly changing laws and regulations.
Joint ventures, also referred to as "business alliances", "strategic alliances" or "corporate partnering", offer an attractive alternative to the traditional method of doing business, and there are numerous advantages to co-venturing. For instance:
- A successful joint venture can offer a company access to much broader markets, distribution networks, specialized technology and personnel, while at the same time sharing the costs and the risks with the other parties to the venture.
- Projects that are too large for one company to undertake can be taken on by several firms acting together.
- A group of smaller competitors can band together in a joint venture to keep afloat in a market that is dominated by one giant company who owns most of the market share.
- A foreign company might form a joint venture with an existing company in a market that the foreign company wants to enter, such as China. The foreign entity typically provides new technologies, processes and products to the joint venture, while the Chinese company would provide an existing business and customer base, experience operating in the local industry climate, a knowledge of local markets, and compliance with applicable governmental requirements.
What are the main aspects of a joint venture?
A joint venture is basically a short-term partnering arrangement in which the parties involved jointly undertake a project for mutual profit. Similar to a partnership, a joint venture can involve any type of business transaction or project, and the parties may be individuals, companies or other types of entities or organizations.
The co-venturers share the costs and the risks, as well as any gains and benefits, and each of them contribute money, property, effort and/or know-how to the joint venture. The participants in a joint venture each retain ownership of their individual property, which is returned to them at the conclusion of the venture.
The parties may decide to enter into a contractual arrangement to cooperate with each other (a contractual joint venture), or they may decide that it's more advantageous to incorporate a separate company to carry out the project (an incorporated joint venture). The life span of a joint venture is typically the life of the project for which it was created, although the co-venturers may determine that the joint venture should carry on for an additional period of time, as required by the nature of the business / project.
The laws governing joint ventures differ from country to country. For example, in the U.S. joint ventures are governed by state partnership and commercial transactions laws. In Canada, there are no specific laws governing joint ventures, and the joint ventures are governed by the written contract between the parties. Therefore having a written Joint Venture Agreement is of paramount importance. If the joint venture is incorporated, with the co-venturers as shareholders, the legal status of the venture is governed by the law governing corporations in the jurisdiction in which it was incorporated. It is important to note there have been court decisions where shareholders in a corporate joint venture have been deemed partners.
Managing risk in a joint venture
Like any other business opportunity, joint ventures have their own inherent risks. This is particularly true when you're expanding into a new market or into another part of the world. Before you decide to venture into a foreign market be sure that everyone on your team is well aware of the local laws and the cultural differences, customs, holidays, and social taboos. Be clear on what the purpose of the joint venture is and how your business would contribute to and benefit from the venture. What would be required of you, and what would your expectations be? What contributions would you be expected to make in terms of money, property, resources, and expertise?
Foreign joint ventures are subject to international trade laws and to local laws governing commercial transactions, labour, and consumer rights. Tax laws also differ from country to country, and you should be fully aware of what these laws are in the countries you're moving into. It's also critical to know whether there are restrictions on the amount of investment or capital distribution that foreign entities are allowed to make. Can you freely move money into and out of the business, or are there limits imposed by law? Many problems can be avoided if everyone involved is very clear on the joint venture's goals and objectives and has a good understanding of how those goals are to be accomplished. A well-researched business plan for the venture must be developed with a full analysis of the aims and objectives. Everyone involved should be well acquainted with the business plan and how it will be implemented. All of the participants must also agree on how the venture will be managed and what each party's role will be in that regard. These points should be clearly spelled out in the Joint Venture Agreement.
How to choose the right co-venturers
Choosing the right partner in a joint venture is essential to your success. You want a partner that can supply resources, property, assets, and/or know-how that complement your business. As with any other business relationship, you will want to check out all potential partners before deciding to embark on a joint venture. Do thorough due diligence, and be sure to search online as well - on the principals as well as the company (if applicable). A Google search can bring up a wealth of information, comments, feedback, personal experiences - favourable and unfavourable - that can help you form a fairly accurate overall picture of the other partners.
Putting together a Joint Venture Agreement
Once you have prepared a draft of your agreement, review it with your co-venturer(s) and legal counsel prior to signing it. At a minimum the Joint Venture Agreement should include the following:
- The purpose, organization and structure of the joint venture.
- How the venture is to be financed.
- Each party's initial and ongoing contributions to the venture (whether capital, skills, equipment, property, know-how, expertise, etc.). Each co-venturer's contribution to the project should be of equal value.
- A procedure for parties to make future contributions.
- The participant's right to participate in the control and management of the joint venture.
- Each venturer's responsibilities with respect to handling day-to-day operations.
- Interest of the co-venturers in the products / proceeds of the venture.
- How profits and losses will be allocated.
- A procedure for a co-venture to sell or transfer its interest to another party, as well as a process for admitting new members.
- A procedure for holding meetings and a method of voting at those meetings.
- A marketing plan.
- Restrictions (if any) on venturers' activities external to the venture.
- What events are triggered by a default by a participant.
- Proprietary rights in property and assets.
- Liability and indemnity of co-venturers.
- How and under what circumstances the venture will be terminated.