Five Questions to Ask Before Forming a Joint Venture

Thinking about entering into a joint venture? These are the questions you need to ask beforehand.

A joint venture (a JV) has been defined as an arrangement where "two or more established businesses agree to pool their resources and respective talents to achieve a particular goal." Any discussion of JVs reminds me of Aristotle's famous quote, "The whole is greater than the sum of its parts." This is because the primary purpose of a JV is to combine your businesses' capabilities with those of another business in ways that create exponential synergies. Companies commonly recognize weaknesses in, or the limitations of, certain aspects of their businesses that can be bolstered by the capacities of another company. If the feeling is mutual, then both companies can agree that they should enter into a mutually beneficial arrangement, but might not know exactly how to proceed (see How Do I Start a Joint Venture?).

This article suggests five questions that you should ask before entering into a JV with another business. Note that this discussion assumes that your proposed JV will be a contractual arrangement that doesn't involve the formation or joint ownership of a corporation, limited liability company, or partnership (see Partnerships vs. Joint Ventures for more discussion regarding this distinction). Ideally, you should consult a corporate attorney to assist you with the negotiation and drafting of your joint venture agreement (as defined below).

How Will the Costs be Split?

When two or more entities form a JV pursuant to a contract (usually called a profit sharing agreement or a joint venture agreement), the first thing they need to talk about is money — and the initial monetary issue they need to resolve is costs. It might be the case that the creation of a JV doesn't incur any additional, material costs for either company. For example, the parties might simply agree to allow each other to utilize mutual resources and services either free of charge or at a discount. However, in instances where costs must be incurred (for example, if the parties need to lease property for their JV operations), then the joint venture agreement (the JV Agreement) must specify how any upfront costs will be apportioned, as well as how the parties will share costs going forward. These provisions must be as detailed and comprehensive as possible, while also contemplating any conceivable future expenditures. Note that the parties can also include additional provisions addressing each party's responsibility for unforeseeable future expenditures.

How Will the Profits be Allocated?

The next monetary issue that the parties need to address is how profits will be split. As with the cost provisions, the terms and conditions of the JV Agreement dealing with profit sharing should be as detailed and forward-thinking as possible. Your profit sharing arrangement can be based on any criteria mutually agreed upon by the parties, but a general rule of thumb is that a party's relative entitlement to profits should be commensurate with its contribution to the JV. Furthermore, in order to minimize potential disputes over profit calculations and disbursements, the parties should make sure that the JV Agreement includes specific terms regarding each party's responsibility in maintaining and sharing financial records pertaining to the JV.

How Will Management and Operational Decisions be Made?

The management and operations of a JV can be tricky when executive decisions must be made. If your JV has only two companies involved, then the simplest solution would be to require that decisions outside of the ordinary course of business must be approved by the mutual written consent of both companies' principals; if there are three companies involved in the JV, then the solution could be that such decisions require the approval of at least two of the principals (and so forth). In any case, JVs naturally involve owners who are accustomed to running their businesses with a certain degree of independence. The purpose of the JV Agreement is to crystallize how major decisions are to be made in the interest of minimizing clashes of autonomous personalities.

How Will We Deal With Disputes and Termination?

You and your JV partners will also have to plan ahead for disputes in the event that one party breaches the JV Agreement. The most conciliatory approach is to provide for a cure period in the event of a breach by the other party. In other words, once you've notified the other entity in writing of its breach of the agreement (including sufficient detail of the breach), then it will have a time period within which to fix the problem, or else you'll have the right to terminate the agreement. A more austere approach is to permit either party to terminate the JV Agreement at any time, provided that they give at least a minimum number of days advanced written notice to the other party. Furthermore, you should make sure that the JV Agreement includes dispute resolution and governing law provisions that are most favorable to your company in the event that a dispute leads to a civil action (see Common Boilerplate Provisions in Contracts).

What Happens After Termination?

The terms of the JV Agreement should address the procedures the parties will implement in the event of a termination by either party (or both parties). These terms will govern how any remaining costs, assets, and cash will be split among the JV partners and how any outstanding third-party contracts (specifically relating to the JV) will be discharged. Furthermore, the parties should specify how any confidential information, proprietary information, intellectual property, work product, client lists, trade secrets, and so forth will either be destroyed, shared, or returned to the other party. The termination provisions of the JV Agreement should also address how any remnants of the JV will be wound down or dissolved in accordance with state and other applicable laws. Finally, these provisions should utilize as much language as possible involving good faith, cooperation, and reasonableness.

Find the business structure that fits your business. Take our business formation quiz for help deciding the best structure for your business.

Talk to a Lawyer

Need help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
Get Professional Help

Talk to a Business Law attorney.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you