Business Joint Ventures
Often businesses want to join together in order to achieve a mutually advantageous goal or outcome such as expanding into new markets or new areas. However, without a well drafted agreement between the parties and a good knowledge of your co-parties there can be costly disputes, which could have a far reaching effect on your whole business. Such mistakes are only usually made once.
KNOW WHO YOU ARE GETTING INTO BUSINESS WITH
If you were going to invest in a business you would normally expect to carry out due diligence on the target. A joint venture will normally require each party to invest money or assets, so it is advisable to know something about the party or parties you are investing with. This is particularly relevant if the parties have ongoing obligations to contribute, for example, towards working capital. Looking at previous accounts and management accounts will give some comfort, especially if the other party will warrant they are accurate. References from existing customers and obtaining details of any current or past disputes will give some comfort as to reputation. If you regularly enter into joint ventures, a standard questionnaire could be produced.
THE BENEFITS OF A JOINT VENTURE
There are of course significant advantages to joint ventures. The most topical is that they are an alternative to businesses obtaining bank lending which may not be available or private equity investment that may be expensive. Additionally, your co-parties will often be able to provide things that you, a bank or investor can’t, such as knowledge, market penetration or practical resources.
THE RISKS OF A JOINT VENTURE
Entering into a joint venture with others can be complex and there are bound to be times when you don’t all agree - it is therefore essential that the objectives of the venture are set out clearly. Problems can also occur if there is a differing level of investment, which may not always be cash or even assets where a party’s time and expertise is its contribution – there can be difficulties in valuing such contributions. There may be different management styles or a clash of personalities, especially if one partner perceives the other as “not pulling their weight”.
Such risks may not be present if bank or private equity funding is involved, although of course these alternatives present other risks and drawbacks.
It is therefore essential to have a clear written agreement in place.
A well drafted agreement should contain at least the following:-
- the objectives of the joint venture
- the financial (or other) contributions each party will make
- how liabilities, profits and losses are shared
- whether any party will transfer any assets or employees to the joint venture
- ownership of intellectual property created by the joint venture
- management and control, e.g. respective responsibilities and processes to be followed, including any matters that require unanimity of the board and any matters that need the approval of particular shareholder.
- the composition of the board
- how any disputes between the partners will be resolved
- an exit strategy
- restrictions on the parties competing with the joint venture and/or the other parties during and/or after the end of the joint venture
The form of such agreement will depend on the chosen structure which could be a limited company or LLP, or simply by means of a contract between the parties.
Jamie Earley, a solicitor in the firm’s Corporate Department comments, “With the continued difficulties for businesses in obtaining bank funding, we are finding that joint ventures are more attractive than ever. Businesses need to remember that in a joint venture each party is only as strong as its weakest link; those interested in entering into a joint venture should perhaps make sure they give as much attention to carrying out appropriate due diligence on the other parties, as they do to getting the drafting right”.
Coffin Mew can advise on a whole range of joint venture and collaboration agreements for all types of structures. If you would like more detailed information on these services please contact Jamie Earley