Joint ventures: a marriage of convenience

Commercial joint ventures can help pool resources, develop new products, tackle bigger projects, access new markets and otherwise reach the parts that solo companies cannot reach. Some planning can help, so think about the below points.

What's my motivation?

Before you figure out how to structure your joint venture, be clear about its purpose and goals. As with every business, a joint venture needs a purpose and a plan. It might be to tackle a single project, such as teaming up to win a contract; to develop and commercialise a niche software application; or to buy and operate a business. Whatever the reason, be clear in your own mind what the joint venture should achieve and make sure your partners share this vision.

Short or long term?

A joint venture is simply two or more entities coming together to carry out a commercial enterprise, which could be short-lived with a limited purpose or have long-term commitment. It might be no more than an informal agreement to cooperate on a project and split the resulting profits. More committed joint ventures often involve setting up a company into which assets, working capital and people are transferred. In the latter case, more documents are needed, such as a shareholders' agreement and agreements to transfer to the new company the things it need to operate.

Funding a joint venture

Decide early on who is bringing what to the table, such as particular assets, intellectual property, skills, personnel or working capital. The value of each contribution will translate into an ownership stake in the joint venture. This in turn translates into profit-sharing and decision-making. Also, remember that interest paid on shareholder loans can be deducted from the taxable profits of a joint venture company.

Decision-making and control

Some joint ventures are genuine 50:50 partnerships. In these cases, neither party has overall control and all key decisions need the agreement of both. This is fine in practice until the parties fall out and find it hard to work together. Anticipate this and decide if you want your joint venture agreement to include some dispute resolution arrangements, which might help break a deadlock.

In many joint ventures, the parties contribute unequal shares. In these cases, how is power divided? Who controls what and who calls the shots? A well-designed joint venture agreement should clarify the decisions on which all or most of the parties have to agree, and how many directors each party can appoint to the board.

If your joint venture is structured through a new company, consider how the board is formed. Just because the partners appoint the directors, it does not mean the directors should simply do as they are told. Directors have independent duties and obligations to the company they represent and to its creditors, and not just its shareholders.

Dealing with disputes

What happens if the joint venture partners fall out? How should disputes be dealt with? Consider an escalation procedure that can help problems be nipped in the bud. If this fails, there is always the option of third-party mediation. If the problem continues, is it serious enough to trigger a mandatory buyout procedure? Do you want to be in a position of having to finance a buyout? If dispute brings an end to the joint venture, how should the break-up be managed?

Exit strategy

If your joint venture has run its course, and hopefully achieved some of its goals, bringing it to an end doesn't have to be messy or difficult, particularly if the parties anticipated the end game and planned for it. Profits can be spilt, the business sold and assets returned. Breaking up can be hard to do but it can be amicable too.

 

Richard Beavan is a partner in the corporate team at Boodle Hatfield

He writes a regular blog about family business for Private Client Adviser