Key considerations when structuring a joint venture

Key considerations when structuring a joint venture
November 5, 2017 Editorial Team
people moving two puzzle pieces together to symbolises a joint venture

If you are looking increase market reach, watch your revenue soar, increase capacity, or simply become more competitive, then a joint venture could be for you.

A joint venture is a legal term used to define the relationship between two or more parties that combine resources, knowledge and skills to achieve a goal. It’s important to note that a joint venture differs from a merger in the sense that there is no transfer of ownership in the deal, and both parties remain separate entities.

When setting up a joint venture, both parties need to decide whether they will establish an ‘incorporated joint venture’ or ‘unincorporated joint venture’.

An incorporated venture means parties will create a new company that will undertake the joint venture. As a result, each party will hold shares in the company. An unincorporated joint venture, on the other hand, means that a joint venture agreement will define the relationship of each participant and each participant will own a share of the property.

Agreement requirements

Regardless of which structure you choose, both will require a joint venture agreement.

A written joint venture agreement should cover the following; –

  • Structure of the management team
  • Identify the objectives of the joint venture
  • Define the ownership of intellectual property
  • List how liabilities, profits and losses are shared
  • Agree on dispute resolution
  • Create an exit strategy

Other considerations

It’s important that you also take into consideration the following factors when setting up a joint venture; –

  • Do a background check and ensure your new partner/s are a good fit ahead of time. The wrong joint venture partner can wreak havoc on your business plan, so it’s important that you undertake due diligence and check the credentials of the other party.
  • Establish clear performance indicators for each party. By establishing performance indicators, you can rectify any imbalance when it comes to level of expertise and avoid future conflict.
  • Push for open and honest dialogue. This means scheduling regular face-to-face meetings and committing to openly share information.
  • Last but not least, it’s imperative that you obtain legal, accounting and tax advice. Talk to a trusted professional and make sure they understand what you are trying to achieve, how you propose to achieve it and why.

If you approach your joint venture in a thoughtful way, you can improve your chances of success and ROI. Once a joint venture is established, effective communication of the business plan to everyone involved is crucial.

If done correctly, joint ventures can be highly profitable. However it is imperative that you seek the right advice before entering into such an agreement.

 

At BDH Leaders, we advise you on the best growth strategy for your business to get where you want to go. View more information on our business services