Introduction

Thinking about diving into a joint venture (JV)? Joining forces with another business can be a great way to tap into new markets, share resources, and create something bigger than you could achieve alone. But, like any business relationship, it’s not without its risks. Before you sign on the dotted line, there are a few key things to consider to ensure your joint venture is set up for success.

Read: How to read business contracts like a lawyer

Tip 1: Know your partner: Who are you getting into bed with?

First things first: do your homework on your potential partner. A joint venture is like a business marriage, so make sure you know who you’re committing to. Ask yourself:

• Do they have a good reputation? Look at their track record, talk to their clients or partners, and do some online research. A few minutes on Google can tell you a lot.

• Are their values aligned with yours? It’s crucial that both parties share similar values and a vision for the JV. If you’re all about sustainable practices and they don’t mind cutting corners, that’s a red flag.

• What are their financials like? You don’t want to hitch your wagon to a company on the brink of bankruptcy. Review their financial statements, debt obligations, and credit history. If possible, get an accountant to help you understand the numbers.

Think of it like dating: would you go on a second date without knowing anything about them? Probably not. Do the same due diligence for a joint venture.

Tip 2: Define the objectives: What do you want to achieve?

Next, get crystal clear on the objectives of the joint venture. What do both parties hope to achieve? Is it entering a new market, developing a new product, or sharing costs and resources?

Having a clear, mutually agreed-upon objective is critical to ensuring everyone is on the same page. Define the short-term and long-term goals and make sure they’re aligned. If one party is looking to expand internationally and the other is focused solely on local growth, it could lead to conflict down the line.

Pro tip: Write down your objectives and make them part of the joint venture agreement. This will help avoid any “But I thought we were doing…” conversations later on.

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Tip 3: Determine the structure: How will you set up the joint venture?

Joint ventures can be set up in various ways, from simple agreements to more formal arrangements like partnerships or limited liability companies (LLCs). Think about what setup works best for your venture:

• Contractual joint venture: A straightforward contract where both parties agree to share resources and profits. It’s less formal and doesn’t create a new legal entity.

• Separate legal entity: This means creating a new company, like an LLC or a corporation. It offers liability protection and is generally better for long-term or larger ventures.

Talk to a lawyer and an accountant to figure out which structure fits your goals, risk level, and tax situation.

Tip 4: Clarify contributions: Who brings what to the table?

Before jumping into a joint venture, make sure to clarify the contributions from each party. What resources, assets, or expertise is each party bringing to the table?

• Financial contributions: How much money is each party investing? Are there initial contributions or ongoing funding responsibilities?

• Intellectual property: Is anyone bringing proprietary technology, patents, or trade secrets? How will these be protected and used by the joint venture?

• Personnel and expertise: Who will provide the key personnel or expertise? Are employees being seconded to the joint venture, or will new staff be hired?

Clearly outlining each party’s responsibilities in the JV agreement prevents future disputes and ensures everyone understands their role.

Tip 5: Agree on roles and responsibilities: Who does what?

To avoid stepping on each other’s toes, it’s essential to define roles and responsibilities upfront. Who will handle day-to-day operations? Who makes strategic decisions? Who’s responsible for sales, marketing, or R&D?

Create an organizational chart that clearly outlines who does what and how decisions will be made. Consider forming a joint management committee or board with representatives from both parties to oversee the joint venture’s activities.

Tip 6: Outline profit and loss allocation: Show me the money

It’s vital to establish how profits and losses will be shared in the JV. Will profits be split equally, or will they be distributed based on each party’s contributions? How will losses be handled?

Set clear guidelines for how and when profits will be distributed. Will it be quarterly, annually, or based on specific milestones? And what happens if the JV incurs losses? Make sure these details are ironed out and documented in the agreement.

Tip 7: Protect intellectual property: Who owns what?

Intellectual property (IP) can cause major headache in joint ventures, so it’s best to figure out who owns what and how it can be used right from the start.

• Pre-existing IP: Make it clear which IP each party is bringing to the table and how it’ll be used. Will it be licensed to the joint venture, or considered a contribution?

• New IP: Decide how any new IP created by the joint venture will be handled. Will it belong to the joint venture itself, or will both parties share ownership?

Get these details in writing with solid IP clauses in your agreement to avoid arguments and keep your valuable assets safe. Because nobody wants to spend their time playing “Who owns what?” later on.

Tip 8: Plan for dispute resolution: When things go south

Even with everyone on their best behavior, disputes can pop up. That’s why it’s key to have a dispute resolution clause in your joint venture agreement. Here’s what to cover:

• Mediation or Arbitration: Include a clause that says you’ll try mediation or arbitration before running to court. It can save time, money, and help keep things friendly.

• Jurisdiction and governing law: Pick which country’s laws will apply and where disputes will be settled. This is a big deal, especially if your joint venture crosses borders.

Think of it as a pre-nup for your business—better to have it and not need it than need it and not have it.

Tip 9: Establish an exit strategy: How do you get out?

One of the most forgotten parts of a joint venture is the exit plan. But just like any relationship, it’s smart to know how to make a clean break—whether things flop or hit it big.

• Buyout clauses: Include a clause that lets one party buy out the other. Spell out the terms and conditions so everyone knows the drill.

• Termination conditions: Agree on what conditions will allow the JV to end. Is it a specific date, hitting certain targets, or just both sides saying, "We’re done"?

• Dissolution process: Lay out how assets, IP, and any debts will be split if the joint venture shuts down. Make sure it’s clear and fair—nobody wants a messy breakup.

Plan the exit, and you’ll save yourself from a whole lot of drama later.

Read: 7 common contract mistakes that could cost your business thousands

Tip 10: Compliance: Stay on the right side of the law

Ensure your joint venture complies with all relevant laws and regulations, including antitrust laws, tax laws, employment laws, and industry-specific regulations.

Consult with legal and tax professionals to ensure your JV is set up correctly and complies with all necessary laws. You don’t want your JV to end up on the wrong side of a legal battle.

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Conclusion

Entering into a joint venture can be an exciting opportunity to grow your business, expand into new markets, and leverage new skills or resources. But it’s not something to rush into lightly. By carefully considering your potential partner, defining clear objectives, clarifying contributions and roles, protecting your assets, planning for disputes, and ensuring compliance with the law, you can set your JV up for success.

Remember, a joint venture is like any relationship—it takes communication, trust, and a clear agreement on how things will work. Take the time to get it right upfront, and you’ll be well on your way to a successful and rewarding partnership.

How Cobrief can help with contract review

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