A joint venture is a business model allowing two or more parties to pool resources and work together towards a goal, either for a limited time or ongoing. The most common reasons for businesses to decide to enter into a joint venture include:
- Sharing resources
- Expanding into new markets
- Increasing market power
While in a a joint venture, the parties involved maintain their independent business identity and simply agree to work together in a limited and specific way to achieve a common business goal.
Choose Your Joint Venture Partner
To create a joint venture, the first thing you’ll need to do is choose a joint venture partner.
Clearly defining and sticking to your business objectives will help you identify a partner that will complement your skills and services and further your company goals.
To be a good fit, the businesses must be able to work well together in order to be successful. Getting to know the people, core values, and culture of a potential partner and their business will help when deciding on co-venturer.
Questions to get to know a potential partner:
- Are they open to collaboration?
- How do they deal with change?
- Are the company leaders trustworthy?
- What do they offer to employees?
- How are company finances managed or invested?
- What management systems do they have in place?
- How do they deal with stress and conflict?
Without trust and some shared core values, it will be more difficult to make decisions and work effectively together.
Decide on the Type of Joint Venture You Want
There are two avenues parties can take to arrange their joint ventures:
The parties can create a new business entity, separate of their standalone companies, which would conduct the work of the joint venture. The new entity may be created as a partnership, corporation or limited liability company and ownership is divided amongst the members.
Another option is starting a contractual relationship. Under this type of arrangement, the JV members would enter into a contract setting forth the terms of the business relationship.
Key considerations between each:
- The complexity of the proposed business venture
- How much liability protection you want for your joint venture business, and
- The amount of money you want to spend establishing the joint venture.
Draft Your Joint Venture Agreement
The final stage of creating a joint venture is writing the joint venture agreement. A JV agreement details the terms of the proposed arrangement and states how the JV will be run between the JV members.
Drafting a term sheet or letter of intent is sufficient while in the beginning stages of the JV.
- Term sheet - document outlining the terms and conditions of a business transaction
- Letter of intent - summarizes the key terms and conditions (both agreed upon or to be agreed upon) relating to the proposed joint venture, but differ because they are signed by the parties and may be binding.
Some people skip term sheets and letters of intent and proceed directly to drafting their joint venture agreement. The members, with their legal and financial advisors, must cover matters concerning:
- Division of profits and losses
- Governance and management
- Member contributions
- Termination and exit strategies
Click here to read our blog post detailing term sheets and questions to consider before entering into a joint venture.
Defining a your business objectives and goals will help you fine tune your search for a joint venture partner and allow you to study the way they run their company. Finding a partner that complements and enhances what you do is important to the strength and success of the joint venture and its owners. The foundation on which you build the joint venture should be turned into a working relationship that promotes trust and teamwork.