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How to Form a Joint Venture

A joint venture is a strategic partnership between two parties, typically companies, that benefits both parties by allowing them to pool their resources to achieve a particular goal. The parties involved in the joint venture share both the benefits and rewards associated with the alliance.

A joint venture provides the cooperating parties with more resources, business expansion opportunities and the ability to move into new markets by working together to reach mutual goals.

This step-by-step guide will provide you with the necessary information and strategies for forming a successful joint venture.

1. Types of Joint Ventures

Before deciding how to set up your joint venture, it is important to research the many types of joint ventures that are available. The type of venture you choose depends upon what you are hoping to achieve.

  • A separate joint venture business: The parties could possibly set up a new company to handle a particular contract; this gives equal ownership over the venture and allows the party to agree upon the management terms.
  • Business partnership: You may choose to merge your businesses to form one new one that will be beneficial for both parties.
  • Cooperation Agreement: A purely contractual cooperation agreement that allows your business to work together in a limited and specific way, such as selling one company’s product through a larger distribution channel available through another company.

If you still aren’t sure what type of venture is best for you, it is wise to seek out legal advice to help decide. Each venture affects your profits, taxes and liability, so it is necessary to decide early how the venture will operate.

2. Benefits and risks

Creating a joint venture, like any important business decision, comes with a certain set of benefits and risks.

A successful joint venture can benefit you by:

  • Increasing production capacity
  • Accessing new markets
  • Accessing new distribution channels
  • Accessing more resources
  • Sharing risks and costs with a joint venture partner
  • Strengthening relationships
  • Providing flexibility

Joint ventures also have risks that can arise if not planned correctly. Avoid these by fully outlining the objectives of the venture and discussing each party’s level of investment and expertise that will be brought into the venture. If effective communication does not occur, you may:

  • Lose time and resources
  • Lose credibility
  • Lose money

3. Plan your joint venture and choose a strategic partner

  1. Create a statement on why you want to form a joint venture, what you are looking for and what your goals are. This will help you clearly determine your objectives and assess your readiness to achieve them.
  2. Use that statement to begin looking for the partner that will fit your specific needs. Find possible joint venture partners by networking and researching in your target market. For example, if you want to expand distribution in a certain area, find someone who already provides that service.
  3. After informally meeting people through networking, schedule meetings with potential partners and be prepared to discuss the needs and abilities of both parties. Remember to discuss how this partnership will benefit them just as much as you.
  4. Choose a partner based on their current business’ performance, similarity of objectives and their reputation. Find someone you trust who is financially secure.
  5. Outline a proposal and come to a mutual agreement about the type of venture you will pursue and the objectives of the venture.

4. Agreements and other documents

Meet to discuss the structure that will be mutually beneficial, and create a written joint venture agreement to outline your goals and protect your interests. An agreement will help prevent possible issues that may arise once the joint venture is operating.

The Joint Venture Agreement should include:

  • The structure of the venture
  • The objectives of the venture
  • Employment considerations, such as transfer or hiring of new employees
  • Financial contributions and tax considerations
  • Management decisions, operations and responsibilities
  • Ownership of intellectual property
  • How profits and loses will be shared
  • Liabilities
  • Termination and resolution of disputes
  • Exit strategy

It is recommended to get expert advice before the final steps are taken. Have your attorney review the agreement and provide any necessary input regarding the structure and your interests.

In addition to the joint venture agreement, you may consider a mutual non-disclosure agreement to protect commercial and trade secrets.

5. Other considerations and ending a joint venture

Communication is vital to building a successful joint venture, so schedule regular meetings for involved parties to meet and share information, metrics and successes.

As businesses change, partnering agreements may need to end. If this is addressed in the joint venture agreement, then the termination conditions will be outlined, and the process will be fairly simple.

Overall, good planning concerning the objectives and the structure of your joint venture will help ensure a successful and profitable endeavor for all parties.

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