In today’s economic climate, businesses are still finding it difficult to access finance to fund growth and, to exploit business opportunities and ideas, are increasingly looking to joint venture relationships.
There are many benefits in entering into a joint venture, including access to new markets and greater resources, increased capacity, the sharing of risk and costs, and often the ability to fund business growth without having to borrow.
If the relationship is established and set up correctly, a joint venture can be hugely successful for all concerned. If not it can have disastrous consequences for both parties and their existing businesses.
Here are some tips to consider:-
1. Choose the right partner
The ideal joint venture partner is one that has resources, skills, and assets that complement your own. Once a potential partner is identified, do your due diligence! Are they financially secure? Do they have the skills, resources and contacts to assist in the exploitation of the joint venture business? What kind of management team/structure do they have in place? What do their customers/suppliers say about their trustworthiness and reputation?
2. Clearly identify the purpose and scope
It is imperative that the joint venture partners agree specifically what the purpose of the joint venture is and the scope of its business. Without this, there is a real danger that one partner may subsequently exploit a particular and potentially separate business opportunity which the other partner had (perhaps naively) assumed would have been exploited by the joint venture company. This will undoubtedly result in a dispute arising to the detriment of the joint venture business and the joint venture partners!
3. Define roles and responsibilities
Each partner should have clearly identified roles and responsibilities in relation to the joint venture business and its management. So as far as possible, the partners should consider all possible requirements in relation to the running of the business and allocate responsibilities to the partners before the business commences. Agreement should also be reached on whether or not partners should be remunerated for carrying out their duties.
4. Communicate clearly
Agree the structure of board of the joint venture company beforehand and put in place a clear reporting mechanism in respect of the joint venture business so as to avoid misunderstandings between the partners and ensure the continued development of the business, whilst giving each party the ability to ensure their joint venture partner is delivering on their duties and responsibilities.
5. Agree funding
Before proceeding, each partner should agree who is investing what and in what form, e.g. cash or other assets. Any funding requirements should be based on an agreed business and marketing plan and cash flow projections. If external funding is or will be required, the source of that funding and how any liability in respect of it is to be apportioned between the joint venture partners should be identified and agreed beforehand.
6. Identify an exit strategy
Whether the joint venture has been set up for one specific project or to develop an ongoing business (see tip 2 above), exiting a joint venture is always easiest when the key issues, such as when and in what circumstances the joint venture is to terminate and investments realised, are addressed and understood in advance. Provisions should also be agreed which detail what is to happen should either partner wishes to exit the joint venture prematurely.Return to the blog archive »