When it comes to forming joint ventures (JV), there is much excitement and complexity. In this post, we’ll break down a joint venture, the different types, why companies form them, and key considerations to ensure success.

What is a Joint Venture?

A joint venture is a commercial collaboration between two or more parties for a specific project. Unlike partnerships or mergers, joint ventures are created with a particular goal in mind, often for a set time. The focus is on combining resources or expertise to achieve a specific outcome.

There are two types of joint ventures:

  1. Contractual Joint Venture (Strategic Alliance): In this setup, the parties agree to collaborate based on a contract but do not form a new legal entity. This is also known as a strategic alliance.
  2. Joint Venture Using a Separate Entity: In this case, the parties create a new legal entity, typically a limited liability company (LLC), to carry out the JV’s purpose. The LLC becomes the vehicle for executing the project.

Reasons for Forming a Joint Venture

  1. Combining Technical Expertise: A common reason for forming a JV is to combine the unique expertise of different parties. For example, a medical device company might collaborate with a doctor who has created a new implant. The company can handle the marketing, while the doctor provides technical knowledge.
  2. Securing a Large Customer: In industries like construction, companies may form a JV to bid on large projects that they couldn’t secure alone. By combining their resources, they increase their chances of landing the contract.
  3. Exploring a Potential Merger: Some companies use JVs to “date” before committing to a full merger. By operating as a joint entity for a limited time, they can see if a permanent partnership makes sense. For example, two companies might collaborate to attract a larger acquirer.

Differences Between a Small Business and a Joint Venture

While small businesses and JVs can look similar, there are vital distinctions:

  • Time Frame: Small businesses usually operate indefinitely, while JVs have a fixed term based on the project’s timeline.
  • Ownership: Small businesses can have one or multiple owners, while JVs always involve two or more parties combining forces for a specific goal.
  • Purpose: JVs are typically created for a single, focused purpose, while small businesses are often set up for broader operational goals.

Critical Considerations for Negotiating a Joint Venture

Before diving into a JV, there are essential questions to ask:

  1. Who are the JV Parties? Are the parties separate entities, or are they individuals coming together? This helps determine the structure of the JV.
  2. Do the Parties Need Approval? If one of the JV parties is owned by a larger entity (such as a private equity group), approval from investors or other stakeholders might be required before moving forward.
  3. What’s the Main Purpose? Is the goal to develop a new product, break into a new market, or explore a potential merger? Understanding this helps structure the JV appropriately.
  4. What Contributions Will Each Party Make? Determine how the parties will split responsibilities, whether it’s marketing, operational expertise, or financial investment.
  5. What Return Does Each Party Expect? Knowing the expected outcomes —whether financial returns, market access, or technological development—is crucial to avoid future disputes.
  6. Is a Separate Entity Necessary? If a new entity is formed, decisions must be made regarding ownership percentages and business control.

Additional Key Issues

Once the foundational questions are answered, the following factors come into play:

  • Ownership and Control: Ownership percentages must be clearly defined if a separate entity is formed. Decision-making processes should also be clarified, including whether any party has veto rights.
  • Cash Requirements: JVs often require cash for operations. Both parties should agree on how to fund these cash needs.
  • Shared Services: Many JVs rely on the parties’ existing employees and systems. Outlining how these shared resources will be managed is essential.
  • Exit Strategy: A clear exit strategy should be in place, regardless of whether the JV aims for an acquisition or completion of a project.
  • Intellectual Property: If the JV leads to creating a new IP, such as a product or technology, there needs to be clarity on who owns the rights if the JV dissolves.

Conclusion

Forming a joint venture can be a powerful way to leverage complementary strengths and achieve significant business goals. However, asking the right questions and developing a strong framework is crucial to succeed. A well-negotiated JV sets the foundation for mutual success, helping each party reach their objectives while minimizing risks.

Joint ventures may seem complex, but they can offer a strategic advantage in a competitive market with the right approach.

Contact InPrime Legal today if you’re joining forces for a new opportunity and need expert guidance with your JV. We’ll help you confidently navigate every step of the process.