Companies, Partnerships and Directors
Many businesses continue to find it hard to access capital for business expansion and entering into a joint venture may provide an alternative solution. A joint venture involves two or more businesses pooling their resources to achieve a shared business goal, usually to increase market share.
Depending on your business objectives, joint ventures can be structured in a variety of ways. For example, two businesses may set up a wholly separate company in which they both own shares or the businesses could enter a partnership. Alternatively the businesses may simply agree to co-operate in a specific and limited way. You will need specialist legal advice on this because the chosen structure can affect how the joint venture is managed, what profits and risks each business will take and how it will be taxed.
In addition, before approaching potential joint venture partners, you should take legal advice on how to protect your existing business’s trade secrets and intellectual property rights and any other legal issues specific to your business.
- Access to a greater pool of skills and technology resources
- Reduced research and development costs
- Shared business risk
- Greater operating capacity
- Access to new or bigger markets
- A broader range of distribution channels
Joint ventures can offer many benefits, including:
Potential risks in a joint venture include integration difficulties arising from a greater number of people collaborating, different parties having conflicting aims for the joint venture and conflict where one party believes that the business contributions or risks are borne inequitably. Cultural differences should not be underestimated.
Key pitfalls include rushing into an arrangement without adequate research and planning, and poor integration procedures can create long term problems. It is important to review your business strategy to see that your expectations for the joint venture are realistic and are aligned with your business’s best longer term interests. Careful integration planning can help diminish negative staff morale from cross-cultural issues and fears for job security. Clear communication at all stages is key.
A written joint venture agreement is crucial. It should set out the structure of the joint venture, its aims, the sources of its funding, intellectual property arrangements, who will manage and control each element of the joint venture, how any deadlock is to be resolved, arrangements for the division of profits and losses, dispute resolution procedures and how the agreement will be terminated.
As with all business agreements, it is important to consider your exit strategy at the outset. Termination may be by notice, expiry of a fixed term or in joint venture limited companies, by one party buying out the other party. In all arrangements be sure to know how confidential information will be protected after the joint venture ends. Who will deal with individual customers? Who will own resulting intellectual property? How will continuing income and liabilities be treated?
A friendly, open and informed approach at the outset of negotiations, together with a written agreement recording the details of the agreement can save time and money when the joint venture concludes. Legal advice at the outset is advised to help achieve a positive outcome. Some joint venture partners decide that they wish to take the next step and merge formally.