How Do I Start a Joint Venture?
A well-defined business objective and thorough analysis of your potential co-venturer are crucial for success.
A joint venture is an arrangement in which two or more companies or parties join forces to engage in a specific business activity. The most common reasons for businesses to decide to enter into a joint venture include gaining access to new markets, increasing market power, and sharing resources. Unlike a partnership or merger, each of the businesses in a joint venture maintains its independent business identity and simply agrees 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. Having a well defined business objective in mind will allow you to look for and identify a co-venturer that complements your business and can help you achieve your goals. Perhaps you have developed an exciting new technology but lack adequate resources to access the right market for your product. You might look for a company with a good market presence in that area and then you could jointly sell, promote, and distribute your product.
Once you’ve identified a company that is a good match with your business goals, you’ll want to spend time focusing on whether your two companies are a good fit. To create a successful alliance, your businesses--and the key players in each company--will need to be able to work well together. Spend time getting to know the people you’ll be working with and the core values of the business. What is their attitude toward collaboration? Do the business leaders share your level of commitment? Will the corporate cultures of your two companies mesh? How financially secure is your potential partner? What kind of management team do they have in place? How is the company performing in terms of production, marketing, and personnel? Most importantly, are the people in charge people you can trust? 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 basic ways you can set up your joint venture arrangement with another party. One alternative is to form a new separate legal entity for the joint venture business with each party having an ownership interest in the new entity. For example, the two parties to a joint venture might decide to form a corporation, partnership, or limited liability company, and the joint venture’s business would be conducted through the new entity.
Alternatively, you might decide to establish your joint venture through a contractual relationship. Under this type of arrangement, the parties would enter into a contract setting forth the terms of the business relationship. This is generally a less expensive option.
The main considerations for choosing one form over the other are:
- the complexity of your 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.
If the venture is relatively small, the costs associated with creating a separate legal entity may not be justified. On the other hand, if liability is a concern, you may want to have the extra protection you get by doing business through a corporation or limited liability company.
Draft Your Joint Venture Agreement
Once you have identified your co-venturer and thought about what type of joint venture you want, you can start putting in writing some basic terms of your proposed arrangement. There are a variety of ways to do this. If you’re in the preliminary stages, you could start by creating a term sheet or letter of intent. A term sheet is a document that outlines the material terms and conditions of a business transaction. A letter of intent also summarizes the principal terms and conditions (both agreed upon or to be agreed upon) relating to the proposed joint venture. Unlike term sheets however, letters of intent 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. Joint venture agreements can be lengthy and complicated depending upon the proposed business venture and relationship between the parties. The key business people in the deal and their lawyers and accountants will need to work through the threshold issues, including how profits and losses will be divided, the formation and governance structure, the contributions by each party, the venture’s tax treatment, its commercial arrangements, and exit strategies for the parties. The agreement usually also has a business description. This should be carefully considered by both parties as it can highlight differences in opinion regarding the scope and type of activities in which the venture should engage. You may want to form a deal team that has the assigned responsibility of navigating through these issues and executing the deal.