Whenever starting a business one of the first considerations is risk. Fortunately, with the help of business partnerships, you can proceed as a joint venture with other partners. Successful joint ventures help spread risk, increase expertise, access new markets, and, ultimately, achieve a successful partnership.
This article will help you begin your business partnership by guiding you through how to find the right joint venture partner and how to set up a joint venture.
What is a Joint Venture?
Before discussing how to set up a Joint venture partnership, however, it is crucial to first understand what the term means.
The exact details of a joint venture depend on the specific joint venture agreement between the partners involved. There are a few common things that you will find in most joint ventures. For example, the partnership involves a clear legal agreement setting up the rights and obligations of each party. Moreover, the written agreement may even include reference to the ownership of any new intellectual property created as a result of the Joint venture.
The crucial thing to keep in mind is that a successful joint venture requires the partners to join forces for that particular project. Resources must be pooled together so that the strengths of each firm can synergize and help fulfill the business objectives for which the joint venture was set up.
It is worth remembering, though, that a joint venture set up like a channel partnership is not just about contacts between senior executives and a few legal documents. There is also an emphasis on the personal connection between the two companies. Moreover, such a partnership is meant to strengthen long-term relationships between the firms as well as their employees.
How to set up a Joint Venture
Step 1: Find a Partner
Before you can begin setting up the joint venture you will need a find another business or person who is willing to enter into the agreement with you.
When looking for a potential partner it is important to keep in mind your own business aims as well as those of your partner’s business. As long as the two firms overlap in their goals, that means that your incentives are aligned and you may make a good fit.
Other factors to possibly consider may also be the work culture in both companies and whether it is compatible. As well as the expertise both bring. For example, having two manufacturers work together on a project helps spread risk but offers limited synergy, whereas, a manufacturer and a distributer working together will, both, reduce risk as well as have synergy together.
Step 2: Choose the type of Joint Venture to enter into
Not all joint ventures are the same. There are, in fact, two different types of joint ventures that you can create with your partner.
The first type involves incorporating a limited liability company and using this separate business as the joint venture. The benefit of this strategy is that it can help the rest of your business avoid potential liability from things that happen in the joint venture. The downside to this form of joint venture agreement, however, is the extra complexity associated with having to set up a separate joint venture business. This is due to the fact that you will have go to through the entire process of registering a company as well as paying its taxes and recording separate finances.
The other route you can take is to set up an unincorporated joint venture. This contractual joint venture works under a joint venture agreement and does not require you to set up a new legal entity. Moreover, one thing to note is that such a joint venture affects your liability in case anything goes wrong. Thus it is only recommended if the scope of the joint venture is likely to be narrow.
Step 3: Prepare a Joint Venture Agreement
This is perhaps one of the most crucial parts of the entire process. When preparing a joint venture agreement there are an entire plethora of things to keep in mind. Moreover, most of these things will require rigorous negotiations on the part of both parties in order to properly settle.
For starters, the joint venture management team must be agreed upon. Moreover, there must be a common business strategy agreed on by both sides. There will also be the question of what business secrets you will gain access to and which of your own trade secrets your partner might need to access. There is a fine line between sharing too little as to be obstructive and too much as to harm your own business. This fine line will need to be discovered and settled upon.
Both parties may also have to find a formula to agree upon how much of the future income arising from the joint venture should go to each partner. Moreover, intellectual property rights agreements may also need to be settled.
Finally, any good business owner knows that whenever you enter a new endeavour, you must have a proper exit strategy. For a joint venture, the two businesses must agree upon when and how the joint venture will dissolve.
A few additional things the parties involved may also consider would be a confidentiality agreement to keep business secrets shared between the two private. Moreover, a distribution agreement may also be set up if it is required.
Step 4: Pay the Dues
One of the most important things to keep in mind after having set up your joint venture is to manage taxes and reporting profits in a legal way that is in line with the local laws and regulations.
The exact steps of this process will depend on the type of joint venture that has been set up. In case you opted for a limited liability corporation you will need to report the earnings and pay taxes directly as the joint venture.
Alternatively, if no limited liability corporation has been set up then the earnings will flow into each of the two companies and recorded on their own respective tax returns. The taxes due will also be paid accordingly by each of the companies depending on their share in the joint venture’s earnings.
Step 5: Watch out for all other miscellaneous regulations
It is well known that starting and operating a business is no simply task thanks to the regulatory framework involved. This statement holds equally true in case you are running a joint venture.
Some things to look out for might be laws regarding ‘borrowing’ employees from either company for the joint venture. In which case the employer identification number will have to be recorded and some local labor laws might even come into play.
Moreover, for large joint ventures that may be considering foreign markets, it will also be important to keep in mind international and cross border laws. These can vary from country to country, thus, doing your due diligence is highly essential.
Benefits of a Joint Venture
There are numerous benefits to having partnering arrangements such as a joint venture.
For instance, if your brand values complement each other it can help the joint venture’s activities go more smoothly than if either company was working alone without a partner. Moreover, it may even allow both companies’ existing customers to become customers of the joint venture. This will obviously provide a huge boost to the venture.
Each company can also leverage its respective business strengths to cover up for potential weaknesses in the other company’s organizational structure. Joint venture partners can also take risks businesses will not usually be able to take thanks to the fact that risk is more distributed across multiple companies.
Finally, there is also the fact that having a partnership of this nature allows the existing businesses to form effective working relationships with one another. For example, it was noted that only 30-40% of a business meeting is typically about business. The rest is about crafting stronger relationships and networking between the two businesses.
This is an unparalleled opportunity that a joint venture provides, to help expand strategic partnerships across industries and build relationships that can be leveraged in other ventures as well.
Drawbacks of a Joint Venture
There are some common issues that may be encountered in joint ventures. It is important to be aware of them and to ensure that the particular contract you sign takes these into account.
For example, there may be a one-sided relationship in which one party benefits more than the other. This can be dealt with by having a detailed and comprehensive agreement with the other business before entering into the joint venture.
Moreover, sometimes teams from each of the companies may not be used to the management styles of the other. In such a case it is crucial to have competent and sufficient leadership that can help bridge the gap and ensure that all members work to the best of their abilities.
The Bottom Line
Setting up a joint venture can bring about an enormous amount of benefits and allow you to further your business’s own interests. Moreover, this can be done while gaining expertise and forming new partnerships which will aid you in the future.