Making joint ventures work for all

The key to making it a success is careful preparation, thorough due diligence and a clear purpose. If the joint venture is successful it can provide a means to achieving accelerated growth in knowledge, skill and profit over both the short-term and long.

Sonio Singh, partner in the Corporate department at Davis Blank Furniss explains that value added knowledge is essential to securing the success of any joint venture. A business must first objectively understand its own identity, where it sits in the market place and what its strengths and weaknesses are. It can then look for a potential commercial partner that excels in areas that will benefit its business the most.

Before deciding on your potential partner for joint venture purposes, it is important to carry out an extensive due diligence process. The due diligence process should initially involve the collation of information about the potential partner’s finances, business model, company ethos and future goals. It may also be useful to find out whether the business has attempted any joint ventures in the past and (if so) consider whether they were successful and if not why.

If the outcome of the due diligence process is positive, take time to consider whether both businesses have sufficient synergies, common objectives and goals for the future. This will help to establish the purpose of the joint venture. If these appear to be in alignment consider what each business would need to sacrifice in practice to ensure those common goals could actually be achieved by the joint venture and whether the businesses could still operate profitably under those restrictions.

Consider how the business will operate day-to-day and whether the managerial structures of two businesses can work together. Think about how the joint venture will be funded, whether any financing will be needed and if so how this will be secured. It is also important to consider what will happen if there is a deadlock and how/ when each business can exit the joint venture and whether there will be restrictions on working with competitors in the future.

It is important to take legal advice as early as possible to ensure you are properly protected during the negotiation phase through carefully drafted Exclusivity Agreements, Confidentiality Agreements, Heads of Terms, Legal Due Diligence and a Joint Venture Agreement. Along with your tax advisor, a law firm can also advise you on the appropriate structure for your joint venture and whether it is better structured as a limited company, partnership or via an alternative vehicle.