Would you like to work with another business on a joint project? Would you like to use your skills on a project that you jointly own, rather than just be paid by the hour? Do you have a resource to develop but you want to share the know-how, costs and risks of development? This is called a joint venture.
A joint venture is when 2 or more businesses work together for a common goal. One business may bring a resource, like a piece of land, and another business may bring a skill, like building know-how.
A joint venture can be superb or disastrous! We assist businesses at the start of a joint venture, and we’ve recently helped people who have come to us when their poorly planned joint venture ended in conflict. I don’t want this to put you off, or for this to happen to you.
This article is to help you understand why you’d enter into a joint venture, what you need to decide, and the essentials to put in the joint venture agreement, so that your joint venture succeeds.
Huge Potential for Small Business
Joint ventures are common among large companies, including in the mining sector, where one business may own or lease a mine and another may bring mining skills to develop the mine.
I’m seeing joint ventures amongst smaller businesses and I’m excited by this development. However, you need good planning and a well-drafted joint venture agreement to help it succeed.
Advantages of a Joint Venture
Why would you enter into a joint venture? A joint venture enables you to use resources and skills for a common goal. Key advantages are that:
- both businesses are incentivised to work hard and succeed as you will both share in the end result;
- each business is contributing resources or skills, rather than spending money to purchase the resources or skills required to develop the end result;
- each business creates the end result and grows more quickly than it could have without the joint venture;
- you share the time, costs and risks with your joint venture partner; and
- the relationship property is for a specific project, so it is easier to define and act on, than a general long-term business relationship property.
Disadvantages and Risks of a Joint Venture
What are the disadvantages of a joint venture and what can go wrong?
A joint venture is a business relationship property. If it is well planned and well documented, it has a considerably higher change of success. If not, then:
- you may have misunderstandings about what skills and resources you will each contribute;
- you may have disagreements on the speed of work and time frame;
- you may have conflicting goals and priorities;
- you may not have legal rights to what you have developed; and
- you may waste a considerable amount of time and money and then face a costly legal dispute.
Solution – Joint Venture Agreement
A joint venture agreement is a legal agreement to formalise the understanding between the parties. A well-drafted joint venture agreement sets out all the terms and conditions between the parties, including the following:
- what you will each contribute;
- timeframes and milestones;
- management of the joint venture, including how you’ll work together;
- prior intellectual property – what intellectual property is each party bringing to the joint venture? The party who brings it should own it. You generally do not want to give up ownership to the other parties.
- developed intellectual property – what intellectual property will be developed for the joint venture? Who will own it? The joint venture is not a legal entity like a company. The joint venture cannot own intellectual property. In theory, it can be jointly owned between the joint venture parties. In practice, it is generally considered more prudent to have each business own the intellectual property that they develop, with licenses to use the intellectual property for the joint venture.
- Cost sharing;
- Profit sharing;
- Liability; and
- Dispute resolution. Even if the joint venture does not succeed as well as you had hoped, a well-drafted dispute resolution can give you an orderly exit path, rather than conflict and long costly disputes.
Would you like to enter into a joint venture with another business?
LV can assist you with:
- early planning – including with a term sheet so that you know what to negotiate with your joint venture partner, to see if it is worth proceeding to a joint venture;
- your formal joint venture agreement – the legal foundation for your joint venture; and
- dispute resolution if required, to resolve disputes as simply and cost-effectively as possible.
If you need the assistance of a commercial lawyer at LegalVision, get in touch today and take advantage of an obligation-free consultation. We have worked with companies small and large, and would be more than happy to assist yours too!