A joint venture is an arrangement between two or more individuals or companies. It is generally used to achieve a specific, one-off, goal or endeavour.
Each joint venture is a unique arrangement, specifically tailored to the needs of the parties and the project involved. However most arrangements share the following common features:
• the arrangement is temporary, for a finite term and relates to a distinct project;
• each party retains its own separate legal entity and business;
• each party is usually responsible for its own debts (unless otherwise agreed), with profits shared between the parties;
• the parties manage their own finances and can obtain independent tax benefits.
A joint venture is not a separate legal entity. It may be structured as either an unincorporated joint venture (there is no company involved and the agreement sets out the relevant terms and conditions) or an incorporated joint venture. This is when a separate company is established to manage the joint venture, with the parties each becoming shareholders in the company.
How does it differ from a partnership?
A partnership usually provides for a long-term or continuing relationship. It may engage in multiple and different commercial ventures, either concurrently or successively over time. A partnership is subject to the relevant Partnership Act in the applicable State or Territory.
Generally each partner is responsible for both their own actions and the actions of the other partners.
So what should you consider?
Here are five factors to take into account when setting up a joint venture.
5 crucial tips for setting up a joint venture
1. Choose the right partner
This seems like an obvious point but it is a critical factor for success and one which is often overlooked or ill-considered in the excitement and haste to start the project at hand.
Conduct proper due diligence with a specific focus on finding partners that:
• you trust and respect
• show workplace cultures and management styles that are similar or complementary to your own
• have ethics, vision and goals that are aligned with yours
• have the relevant expertise and necessary resources (financial and otherwise) required for the joint venture project.
2. Be clear about terms and conditions
It is important for the joint venture partners to thoroughly negotiate and reach agreement on all relevant terms and conditions at the outset to avoid any future conflict or uncertainty.
It is vital to detail the purpose of the joint venture, the capital contribution, human resources and other assets to be contributed by each party. Partners will need to outline their respective roles and obligations and how costs, risks and profits (or losses) are to be apportioned.
Difficult or uncomfortable discussions should be tackled head-on rather than being avoided.
These may be in relation to matters such as what happens if one party makes an error or poor decision which negatively impacts upon another party or the outcome of the endeavour. Or, or if one party loses interest or displays a lack of commitment to the project, or what happens in the event of the death or incapacity of the JV partner.
Another key matter for discussion is how the parties intend to resolve any conflict in the event that a disagreement or deadlock occurs.
3. Draw up appropriate documentation
It is important for the joint venture partners to clearly document and confirm the agreed terms of their relationship and their obligations towards each other and the project.
A comprehensive Joint Venture Agreement should be drawn up and carried out by the partners.
At a minimum it should clearly stipulate:
• introductory matters, including identifying each partner, the date of the agreement and any key definitions;
• the objectives and duration of the venture;
• the roles, responsibilities and obligations of each party;
• financial matters, such as budgets, capital contributions, borrowing or lending rights, sharing of costs, income and any profits or losses;
• the management of the parties. This would include commitments to attend meetings, KPI and reporting obligations, how disputes are to be handled and the consequences of a party’s failure to comply with its obligations;
• how parties can exit the joint venture early; and
• how and when the agreement will terminate and the ensuing rights and responsibilities of the parties.
4. Ensure proper communication
All partners must maintain open, honest and constant communication. This will ensure all partners remain ‘on the same page’, aware of each other’s actions and up to date with the progress of the venture. It should help to diffuse or circumvent many potential misunderstandings or conflicts between the partners.
5. Consider the future
It is important for the parties to consider exit strategies in the event that any party wishes to leave. It is also relevant to consider what will bind the parties once the joint venture comes to an end. For instance obligations to maintain confidentiality, non-compete covenants, and the use of any information obtained in the course of the joint venture for the individual benefit of one party or to the detriment of another.
As with any commercial undertaking or legal arrangement, there are both benefits and risks associated with a joint venture. In order to maximise the advantages and minimise any risks, it is imperative to properly consider and prepare before establishing a joint venture.
Obtain specific legal and financial advice and undertake appropriate due diligence. Participate in frank and meaningful negotiations and execute a well-drafted agreement to formalise and govern the mutually-agreed terms of the joint venture arrangement.
