Joint Ventures – How to avoid a coalition of chaos
As our last two Prime Ministers can no doubt testify, forming any kind of coalition or understanding with another party can be extremely difficult, costly and, ultimately, unhappy for all concerned. For that reason, political parties in the UK tend to only enter into them if no other options are available.
By contrast, in the business world joint ventures are far more popular, can bring a number of benefits for each party and can lead to long term successful and profitable relationships between two or more businesses.
A joint venture can potentially allow businesses to undertake a new venture much more quickly and efficiently than either one could do by itself. It can allow businesses to pool resources (such as property, employees and equipment) and enable them to de-risk a new project by sharing the funding costs and other liabilities. They can also be extremely useful where each party brings different expertise or specialism to the table so that the joint offering is far greater that either could separately provide.
However, although joint ventures can offer many benefits, as with any relationship it is important to set the ground rules at the start and have these set out in a legally binding agreement. Some key points to consider are:
- What structure will the JV take? Often it is preferable to set up a new jointly-owned limited company or limited liability partnership to operate the JV business. This has the added benefit of providing limited liability around the JV and can help protect the two existing businesses from the risk of the JV business failing.
- What will each party contribute? This could be a financial contribution but it could also include providing equipment, premises or other assets to the JV (such as specialist skills, knowhow or patents or trademarks). Consider also what each party must contribute if further funding is later required.
- Who will own the JV and its assets and how will profits be split? Will each party have an equal share or will profits be split in a different ratio (eg to reflect a time or financial commitment)? If any new assets are created (such as intellectual property) who will own these?
- How will the JV be managed? Will each party have an equal number of votes or right to appoint directors to the JV company board? Consider including a mechanism that will help resolve any dispute that may arise.
- How long will the JV last and what is the exit strategy? Has the JV project got a fixed lifespan or might it continue indefinitely? What happens if one party wants to sell out? How do the parties ultimately realise their investments (eg trade sale, MBO, flotation etc)?
With careful planning and setting up robust legal structure and agreements at the outset, businesses can help ensure that their JVs deliver success and profit for all parties. And that, unlike in politics, they can remain friends!
Martin Frost is a director in the Corporate team at Lupton Fawcett and is based in the York office. Martin and the team regularly advise on joint ventures and shareholders/investment agreements as well as buying and selling businesses and companies. Please contact Martin for further information.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.