A Joint Venture is a business arrangement or a commercial enterprise undertaken jointly by two or more parties. However, each business or party remains its entity, separate from the participants’ other business interests.
Every joint venture is different and requires a plan that addresses all its unique aspects. Still, it is well to remember that joint ventures often either fail or they disappoint each participant. It is okay to be sceptical, be cautious, and be clear. Don’t let the excitement of the planning stage foster the assumption that the results will be so beneficial to all parties and that the future will take care of itself.
Here are five things to check before starting a joint venture:
1.BUSINESS STRATEGY: Every partnership should begin with careful planning. Before you proceed, you should review your business strategy to see if a joint venture is the best way to achieve your aims. Analyse the strengths and weaknesses of both businesses to see if your partner is a good match. SWOT analyse your business. Assessing the compatibility of both joint venture partners should not be overlooked. To thrive, both businesses should be compatible and complement each other’s strengths and weaknesses. This is where SWOT analysis comes in to determine the strengths, weaknesses, opportunities, and threats of each joint venture partner. If there seems to be a clash of strengths and opportunities, it means a joint venture is not possible or the venture partner is simply not suitable for your business growth and sustainability
2. ROLES: Do not assume that a general description of a partner’s role implies that all related tasks are included in the role. Create a list of tasks—both expected and those arising in the event of possible contingencies—and assign them to the respective partners. If there are tasks that neither partner can or will perform, choose the third-party contractors for those tasks before the venture is formed or at least have a clearly defined selection procedure. This list of assigned roles should include less-than-obvious responsibilities such as risk management and emergency planning. If the management team of the joint venture is responsible for these areas, this should be delineated and written policies should be required. Shared management responsibility sometimes results in circular finger-pointing when things go wrong.
3. A DETAILED JOINT VENTURE AGREEMENT: Certain areas should always be covered:
- Structure of the joint venture (ownership, voting rights, governing body)
- Objectives (or a reference to a business plan)
- Financial contributions each will make (up-front and callable or contingent)
- Composition of the management team and any key individuals to be assigned
- Contributions of intellectual property to the joint venture and ownership of intellectual property created by the joint venture
- Allocation of profits and losses.
- Liabilities of partners to each other and indemnities.
- Rights to business opportunities found by but not suitable for the joint venture
- Dispute resolution procedure
Leave as little as possible “to be worked out later.” More likely than not, later will be harder.
4. CLEAR PERFORMANCE INDICATORS: Establish clear performance indicators for each party to the joint venture. What if the projections in the business plan are not met? It is not uncommon for the two parties to have different expectations about what the joint venture can achieve at different times in the future and if those expectations are not met, how it will affect the respective contributions of the parties. For example, if one party is providing the financing and the other party is providing expertise, will the former feel that its financial commitments should be reduced if there are delays in achieving the profit targets? Performance indicators will provide both parties with a better understanding of what each can expect from the other and it will also probably raise important questions about the changes that should occur if the performance indicators fall short.
5. AN EXIT PLAN: A joint venture can be taken as a contract and if the contract becomes rocky, the parties must negotiate the terms of separation at the time they want to end their relationship. This is often a time when the partners have widely divergent views on what is “fair” and there may even be ill will between the parties. One common way of addressing the prospect of “irreconcilable differences” in the future is to have a buy-sell agreement (or incorporate buy-sell provisions in the joint venture agreement). It is important to create such an agreement at the outset of the joint venture because it can be very difficult to negotiate anything at the time of separation, even the process by which the terms of separation will be decided.