How do joint ventures work?
How a joint venture works in practice will vary depending on its structure, industry and objectives. However, some fundamental aspects and considerations on how to set up, run and dismantle a joint venture apply to most arrangements.
The formation of a joint venture
A joint venture occurs when two or more parties agree to work together. But how to find an appropriate participant?
Whether you’re looking to partner with a company or an individual, there are plenty of places to start your search.
Our guide on how to search and find a business partner has more information, but in summary, these could include the following:
- Existing contacts – You could save yourself time and money by partnering with an existing contact such as a supplier, customer, investor or simply someone you’ve met socially. Checking your personal and professional contacts database is a great way to get started.
- Trade shows – These events provide a panoramic view of your industry, and give you insight into how potential partners present themselves, handle clients and pursue new business.
- Search engines – For best results, make sure you type in the sort of keywords you’d use to describe your own business, or those specific to the type of company you’d like to partner with.
- Social media – Look for companies which follow you, add you as a friend or visit the same pages as you. They may well share your interests and objectives.
Before you approach a prospective joint venture partner, due diligence is crucial. Many companies publish key financial data on their site, so you may be able to download the latest set of accounts, and you may even wish to sign up for newsletters and email alerts too.
When you’re examining a company, look at how they present themselves. Is their website up to date? Is their correspondence professional? Are they punctual in handling enquiries? If they can’t promote their own business effectively, chances are they won’t be able to promote a joint venture either.
You can also visit the Companies House Register, which provides up-to-date information on all UK limited companies and search basic information free of charge, or download an in-depth company report for just £1.
Finally, a quick Google news and reviews search should bring up all the latest stories and testimonials about your potential joint venture partner. If they’ve got any skeletons in their cupboard, you should be able to find out here.
Next, you’ll want to plan out how your joint venture relationship will work.
What kind of arrangement will you have? How will the work, responsibilities and profits be split? These are all things you will want to think about before entering into a joint venture with your potential partner.
You are allowed to work together on a verbal agreement alone, but it is always far more helpful to have something in writing defining the terms of the business partnership, such as responsibilities, liabilities and matters of ownership.
Here are the details you should include in your agreement:
- Contribution – how much capital is each partner paying into the business?
- Ownership – what percentage of the company does each partner own?
- Distribution – how will your profits and losses be distributed amongst the partners?
- Responsibilities – which areas of the business will a partner look after? (for example, financial reporting)
You may also want to determine the measures for what happens in the unfortunate event of disagreements or conflict within your business or project, which leads us to our next section:
The management of a joint venture
As you can imagine, the day-to-day management of a joint venture varies based on each individual company and their goals. However, there are some things that stay consistent through every successful venture.
Every good partnership is sure to have a good level of communication (for example, regular meetings, progress reports, and updates to ensure that all important partners and stakeholders are informed about the project’s status, challenges, and opportunities). Good project management skills (and software) are essential here.
Establishing the terms of the agreement is also crucial. This includes defining the scope of the joint venture, the roles and responsibilities of each party, the division of profits and losses, and the exit strategy. A well-drafted joint venture agreement should also address potential disputes and provide a framework for resolving them.
The parties involved in a joint venture may also want to ensure that they are properly legally covered both for the type of work they are doing and the country they are based in. There is the possibility of potential claims and liabilities arising during the course of the project, so an indemnification agreement can help to protect one or both of the parties from unexpected losses.
Joint ventures will involve sharing sensitive business information between the parties involved in most cases, and this is where non-disclosure agreements would come in. Non-disclosure agreements can help protect confidential information and prevent it from being shared with unauthorised parties.
The termination of a joint venture
The termination of a joint venture can occur for various reasons, such as the completion of the project, the achievement of the venture’s objectives, or the breakdown of the relationship between the partners.
This is when the exit plan or strategy comes into play, ensuring a smooth ending (even after a bumpy ride). There should be procedures in place to distribute the remainder of assets according to whatever agreement was originally established and resolve any outstanding liabilities or debts together. Plus, notify any third parties that may be affected by the termination of the venture, such as employees, customers, suppliers, or other stakeholders.
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