Can a Joint Venture Help Your Business Overcome Economic Uncertainty?

Can a Joint Venture Help Your Business Overcome Economic Uncertainty?

Given the unstable economic landscape, venture capital funding for many businesses has dried up, and, when available, has become more costly. That is one reason why businesses have laid off workers or avoided new hirings, and many have become wary, for now, of developing new products, of entering new markets for their products, or of expanding their services. A joint venture is one way businesses innovate, enter new markets and grow with less risk during these times of uncertainty.

Joint Venture 101

In essence, a joint venture is a business arrangement between two or more parties who agree to work together for the purpose of accomplishing a specific objective. A joint venture is a separate legal entity, even when it is less than formally arranged, but with each party responsible for both profits and losses in some agreed formula. A joint venture does not require the forming of a formal partnership or other formal entity, such as a shared corporation between two companies, and can be formed just by a written or oral agreement to do so.  That said, joint venturers often form new legal entities that can include partnerships, corporations or limited liability companies.

Advantages and Disadvantages of a Joint Venture

Joint ventures allow individuals or businesses to pool their resources, which may include product development and sales, client lists, skilled employees, distribution channels, technology, or intellectual property and funding contacts and resources, such as credit and collateral. Joint ventures allow companies to pursue opportunities that they may not be able to finance or raise capital to fund on their own, or to research, staff, produce and market without a co-venturer. Joining up as a co-venturer with a local business can also help facilitate entry into distant or international markets, which may otherwise present legal or cultural barriers to entry.

Another significant benefit of a joint venture is the ability to reduce costs, particularly should a new product, investment, service or territorial sales fail to develop quickly.  Sometimes, an unsuccessful effort can be resuscitated by taking in a co-venturer with the ability to provide the missing key to success.  This is particularly true in industries where development costs are high and in developing countries where political and economic unrest can derail even a well-executed business plan.

The initial challenge to the forming of a joint venture is negotiating an agreement that satisfies both parties. As a result, many joint ventures fail to get off the ground. Unless both parties are willing to concede at least some control, the venture will likely be unsuccessful, wasting both time and money for everyone involved. For joint ventures to succeed, the goals and commitments of the two companies should be aligned.

What to Look for in a Joint Venture Partner

When looking for a joint venture partner, it is imperative to do your research. This is true even when the potential co-venturer is a known supplier or customer, and is especially true when you are joining in a venture with a competitor.  In addition to thoroughly vetting your potential co-venturer’s financial status, litigation history and business reputation, it is also advisable to make sure that your management styles, long-term visions, and corporate cultures don’t clash.

If they do not operate in the same industry or country, it is important that they understand what they’re getting into. This is particularly true in the case of highly regulated industries, such as cannabis, finance, or healthcare, where the regulatory burdens are significant.

Joint Venture Agreement

Before launching a joint venture, the parties should first resolve a number of legal issues, including as to the structure and management of the joint venture, the financial contributions of each party, the mutual goals and objectives of the parties, the duration of the venture, and the protection of intellectual property. Liability and insurance coverage responsibilities must be considered and confirmed in writing, where these may become an issue, such as with healthcare products or transportation, for example.  It is best to address these issues in a written joint venture agreement.

While each joint venture agreement should be tailored to the parties’ unique circumstances and desires, below are additional key issues that should be addressed in writing:

• Entity Selection (especially if forming a partnership or LLC, corporation)
• Purpose of the Joint Venture
• Length of the Joint Venture
• Duties and Obligations Regarding Management and Governance
• Resources to Be Contributed by Each Party
• Allocations of Profits and Losses
• Buy-Sell Provisions
• Capital Raising
• Cash Distribution Provisions
• Dispute Resolution
• Dissolution of the Joint Venture
• IP Protection
• Regulatory Compliance
• Tax Matters
• Governing Law and Forum in the Event of a Dispute

How We Can Help

The attorneys of Scarinci Hollenbeck’s Business Group have extensive experience advising in implementing, financing, governing, and dissolving joint ventures across the country and around the world. We can help ensure that your venture is successful by tailoring transactions to your unique needs and taking steps to identify and minimize risks.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.