A Joint Venture Agreement is a legal agreement in which two or more business, who agree to work together for a specific purpose, set out the terms and conditions of their relationship.
Why form a joint venture?
There are many reasons why businesses form joint ventures but often it is to gain access to resources, new markets, expertise and/or production capacity. Joint ventures might be a way to grow your business without having to borrow or seek outside investment. A joint venture (jv) partner may be able to give you access to their existing customer base and you may achieve economies of scale in purchasing, research, marketing and development.
A joint venture can be very flexible. For example, a jv can have a limited life span and only cover part of a business' operations, thereby limiting the commitment for both parties and the their exposure.
The potential benefits of a successful joint undertaking include:
- Shorter learning curve - expanding into new markets, developing products, and improving productivity, can be time-consuming and costly. Forming joint ventures can help small businesses reduce lead time, acquire expertise, and reduce costs.
- Enhanced credibility - getting known and building a good reputation can difficult. Collaborating with a better-known and established partner can enhance credibility of a smaller partner.
- Develop new profit channels - a well chosen joint venture partner could help develop a smaller partner's sale force and marketing effort more efficiently.
- Build barriers - collaboration with strategic key partners can make it harder for competitors to enter the same market, keeping profit margins high.
Legal structures for working together
There are several business structures that can be used to set up a joint venture. The most flexible is a jv agreement where the businesses involved retain their own legal identities but enter into a legal agreement to work together, for a specific period of time, towards a particular goal. Such an agreement would typically set out:
- The names of the parties and the purpose of the joint venture
- The term of the venture - when it starts and ends
- The financial contribution of each party
- How the profits and losses are shared between the parties
- The role of each party
- How the joint venture will be managed and controlled
- Confidentiality - how each party's business secrets will be protected
- Intellectual property rights.
A joint venture contract is a legally binding agreement. It is the simplest, cheapest and most flexible way to set up a joint venture since it does not involve any structural changes and the businesses involved retain their own identities and autonomy. Each participant is liable on its own share of profit and gets the direct benefit of any tax reliefs. A joint venture contract is sometimes also called a co-venture agreement, joint undertaking or jv agreement.
Another way to set up a co-venture is to form an entirely separate business entity e.g. a new limited liability company, business partnership or limited liability partnership. Forming a new business entity involves structural and legal changes to each party in the venture.
Planning for success
The cost of forming a jv can be relatively low. The key to a successful relationship is in the planning. These are some of the key areas to be aware of and consider before entering into an agreement:
- Goals - set clear goals, know what you want to achieve
- Find the right business partner
- Plan the venture - under the legal aspects of entering into a joint venture, plan your negotiating tactics
- Manage the relationship - a good relationship is built on trust, communication, and understanding, all of which take time and effort to develop.
Choosing a partner
If you're thinking about forming a joint venture, then it would be wise to spend some time thinking about your business and what you need in a partner. Be aware of your strengths and weaknesses: know what you can bring to the venture and know what you want from a joint venture partner. You might want to perform a SWOT (strengths, weaknesses, opportunities and threats) analysis to discover whether the potential partners are a good fit.
When assessing a potential partner you should carry out some basic checks, including:
- Are they financially secure?
- What is their credit rating? Do they have any credit problems?
- Are they part of any other joint venture arrangements?
- What's their management structure?
- What's their overall performance in their markets and as an employer?
- What do their suppliers and customers say about them?
Choosing an appropriate partner for your joint venture is very important. You need a partner that complements the strengths and weaknesses of your business and is trustworthy. A good cultural fit is also important, especially if you are entering in to a joint venture with a partner in a different country.
Collaborating with competitors
In general, you can form a jv with any other business, even competitors. Competition law, however, aims to stop collaborations that reduce competition. This applies if you and your joint venture partner(s) would enjoy substantial market power over a long period. Certain types of collaboration such as price-fixing and cartels are not allowed.
The penalties for breaking competition law include:
- Business fined up to 10% of the worldwide annual turnover and ordered to change practices
- Individuals engaging in cartel activity can be jailed for up to 5 years
- Company directors can be disqualified from managing a company for up to 15 years.
If in doubt, seek legal advice before entering into an jv agreement.
A simple joint venture contract
The Clickdocs Joint Venture Agreement is suitable for the simplest form of joint venture where there are no structural changes and the parties remain independent legal entities. Their co-operation is based entirely upon the written contract. Each partner contributes resources to the joint venture, has a specific role and takes a share of the profits.
The venture is for a specific project, for a specific time period. Any party to the agreement can end the joint venture by giving appropriate notice to the other(s). The agreement will also end, automatically, if certain events occur. For example: one of the parties goes into liquidation or administration.
A confidentiality, or non-disclosure agreement, may also be useful if either party will be sharing commercial secrets.
This draft contract is suitable for use in the England, Scotland and Wales by two or more parties wishing to form a business venture. It includes the following clauses:
- details of the parties
- purpose of the joint venture
- contribution of parties
- bribery and corruption
- intellectual property rights