Thinking Of Entering Into A Joint Venture Partnership? Follow Our Top Tips & Practical Advice
Updated: Feb 8, 2021
Joint ventures are a great way to combine the knowledge, costs, management, profits and development for business and property projects between different stakeholders. The importance of a joint venture agreement is to capture the relationship between the parties and the roles they will play in the success of the venture.
Unfortunately, it is estimated between 40 to 70% of joint ventures fail, which can cost entrepreneurs time, money and frustration. Despite there being different types of joint venture agreements, often there are several phases of a joint venture which can fail due to a common set of mistakes, below we have provided 7 practical tips to consider when entering into a joint venture.
What is a joint venture agreement?
A joint venture is a commercial arrangement between two or more individuals or companies who agree to come together to achieve a common objective, such as developing new products or expanding existing markets. There are various reasons for a company to decide to enter a joint venture, including:
· Sharing resources, like employees, distribution channels or equipment;
· Sharing expertise, such as niche technical expertise or a specialist financing team;
· Sharing the cost of operations.
Under English law, the establishment of joint ventures is not prescriptive; there are no laws restricting the structuring of a joint venture. Although there is no UK legislation that expressly governs joint ventures, governance can be established by way of incorporation as a company subject to UK company law, in particular, the Companies Act 2006 (CA 2006). There is, however, no requirement for both parties to be resident or incorporated in the UK.
A UK joint venture typically takes one of the following forms:
• A Private Limited Company;
• An Unlimited Liability Partnership;
• A Limited Liability Partnership;
• A Contractual Arrangement.
When exploring a joint venture partnership, it’s vital that each party is agreeable to the objectives and strategy. At Serenity Law LLP, we utilise our expertise in the industry sector of businesses ranging from SMEs to larger corporations by drafting bespoke agreements for the purpose of the joint venture for example property joint ventures and avoiding any potential risks to the project.
1. Take your time to do your due diligence
Utmost care should be taken by all parties involved in the potential joint venture partnership. The type of due diligence necessary will depend on the type of project and the venture the parties are entering into, however there are some areas that are consistent no matter what type of joint venture you are entering into. Consideration should always be given to undertaking background checks on your partner. In particular, financial and commercial checks should be undertaken on any potential partners to form a clear picture of any potential risks resulting from the joint venture.
By taking the time to conduct in depth due diligence checks, you are protecting your and/or your business from potential reputation or financial loss. If you are entering into a partnership with someone you have not done business with previously or a venture into a new international jurisdiction, caution should be made to ensure there are no concerns of different objectives, compliance with regulations to ensure the venture may not impact your budgets and reputation. Taking it slow and being thorough in your due diligence increases the likelihood of discovering any unsavoury conduct before it’s too late and you’re in business.
Whether you are well acquainted with your budding partner or not, it’s important to carefully assess and use rational judgement based on all available facts. The team at Serenity Law LLP are experienced in assessing risk and offering balanced, impartial advice both before and after the venture has been agreed upon. If you have questions relating to your intention to enter a joint venture, or would like advice on an existing agreement, book a free consultation with one of our qualified specialist solicitors.
2. Encourage the use of lawyers at the early stage of negotiations
When seriously considering entering a joint venture, we encourage use of lawyers sooner rather than later. As with so many scenarios, it’s better to prevent a possible negative outcome than deal with it after it’s happened.
Whilst the involved parties may believe that they’ve got the perfect agreement, there is the possibility of this agreement turning sour quickly. Rather than allowing this to spiral out of control to a position where there is no saving the venture, your partnership or your reputation, careful preparation for every eventuality is key.
By involving lawyers at the early stages of negotiations can assist in tapping into their knowledge and experience of the types of issues that you should be aware of when entering into business or property ventures. This could potentially avoid lengthy litigation if it transpires the venture you have been looking to enter into is not based on current or local legislation (if in a different jurisdiction) or there are issues in the delivery of the goods/services or supply chain you may not have considered.
Our experienced team aim to avoid any issues at a later stage by considering the legal consequences of every aspect of your agreed venture wherever possible. Should you not have received advice in the first instance, we are also knowledgeable in minimising the impact of any issues that have occurred and revising documentation where necessary. Call us on 08000197773 to discuss your needs.
3. Protect your intellectual property rights
When considering the intellectual property necessary to operate your joint venture, it can be prudent to consider whether this was previously owned by you/your company, or whether this was developed as a part of the joint venture. Either way, it’s important to detail the ownership of all intellectual property in advance of commencing with your joint venture, including who has ownership should the partnership come to an end.
Intellectual property is valuable and if protected correctly in your joint venture agreement. By ensuring there is clarity of the intellectual property rights at the outset that is developed jointly as a part of the venture or is shared by one of the parties of the agreement avoids any lengthy disputes if the relationship goes sour.
4. Consider your land use rights and conduct due diligence as necessary
If property is a part of your Joint Venture Agreement, establishing your land use rights from the offset is vital.
It is important to consider and establish the ownership, funding and any development on the land is properly recorded within the agreement. Furthermore, clear objectives and role management of the joint venture assist to ensure if there are any issues with the use or development of the land the intentions of the parties are properly considered and recorded in the joint venture agreement.
Other issues to consider for property joint ventures are the tax consequences of the deal, any land rights or issues with the title of the land, planning consents for development and construction, skills, credentials and equipment are all factors that should be discussed and drafted within the agreement also.
5. Agree any targets and expectations from the outset
A joint venture can work well for many partnerships, allowing projects that would have otherwise been impossible to go ahead. When two or more parties are combining their expertise with a common goal, it’s vital to ensure your lawyers record the overall goal and smaller targets set to achieve the goal in your Agreement. In many cases, two parties who feel passionately about the project may not approach the project from the same perspective or with similar methods in mind. This is when relationships can begin to deteriorate without pre-prepared records within the Joint Venture Agreement. By taking the time to agree upon all expectations before the Joint Venture Agreement is signed, all parties are legally bound to adhere to this, minimising the likelihood of a dispute.
6. Clearly define the decision-making authority
Similarly, to when specifying expectations and targets from the offset, it’s also vital to record those with the authority to make key business decisions. You may, for example, trust your senior leadership team to make key decisions relating to business operations, whereas your new partner may prefer for all decisions to go through them first.
Firstly, we recommend clearly defining management structures involved in each business operation, followed by their veto powers. Financial responsibilities are also crucial to define. Be precise when recording who is to control the financial management of the venture, including how objections should be put forth should they arise.
7. Prepare to disembark your venture
Markets, business and your partnership will undoubtedly change with time and this is to be expected. Your joint venture may be able to adapt, but eventually, your partnership may come to an end. Particularly as joint ventures are often developed for a specific project. Prior to signing your Joint Venture Agreement, you should ensure there are records of any triggers that would be grounds for termination of the venture.
Depending on the nature of your venture, there will be different exit conditions specified. In some c