Many businesses are able to create new products and bring them to market all through their own processes. But sometimes keeping everything in house is not the most efficient or effective way to do business. In addition, another company may have a patented process or device that you want to incorporate into the new product, but a simple licensing agreement may not make sense. In these situations, you may decide that the best course of action is to enter into a joint venture with the other company. This will allow you to combine resources, processes, markets, and access to materials to broaden your reach, allowing you and the other entities involved to see a significant growth in profitability.
However, there are a number of hidden pitfalls that may get in the way if you are not careful. This is why so many companies here in Pennsylvania use an experienced business attorney to help them form a joint venture.
1. Make Sure a Joint Venture Is the Right Approach
Joint ventures tend to be contractual in nature, although some joint venture parties will set up a special purpose limited liability company (LLC) to handle the business of the parties. Regardless of how you set this up, you have to make sure this is the right way to proceed. In some cases where you are thinking of going into business with another party so you can access its intellectual property, you may be able to achieve your goals through a licensing agreement. This will require the payment of a fee and may help you avoid the headaches of running a business together.
You also have to decide if the plan is to do this for a finite period of time or make this an ongoing venture. If you and the other parties are leaning toward the latter, then a partnership may make more sense. This is because most successful joint ventures are for a limited period of time with the aim of achieving a specific goal.
2. Do Your Due Diligence
Choosing a joint venture partner is similar to deciding on any other close business relationship. You need to make sure your partner can deliver on its end of the bargain. It is one thing for a party to promise something, but you need to do your due diligence to make sure they can deliver. In addition, you will have to do a thorough background check from a legal and financial standpoint. The last thing you want is to enter a joint venture with another party that is actually in financial distress or has extensive legal problems. If you aren’t careful, you may just be buying yourself a lawsuit.
3. Decide on How the Joint Venture Will Be Run
The decision-making structure of your joint venture can often make or break the business. You need to be clear about which party will be responsible for each aspect of the venture. Since you are getting into this business with one or more other entities, you have to keep in mind that your partners may be used to always calling the shots. If you aren’t clear about roles, responsibilities, and authorities, your joint venture could collapse and lead to costly litigation.
4. Choose the Right Funding
The joint venture is going to need to be capitalized. You have to decide on the amount that will be contributed to the joint venture by each party, including the valuation of any real, tangible or intangible property that will be used by the business. This will not only have an effect on the split of profits or losses, but will also determine each party’s basis for the purposes of taxes.
5. Choose an Exit Strategy
Joint ventures are not designed to last forever. Each joint venture partner should be clear about its best case scenario for the joint venture. This may be selling it to a third party, either as an asset or stock sale. It may make sense to bring the joint venture public, and use the funds raised to buy out each joint venture party. Tied into this is a need to be clear about each party’s share of the joint venture, including valuation for purposes of a buyout.
6. Get the Right Agreement in Place
Hiring an experienced attorney to draft the joint venture agreement can go a long way to avoiding any disagreements or disputes. Clarity is vital, as is making sure that each party feels that the agreement adequately reflects its understanding of the joint venture. Careful attention should be paid to provisions regarding funding, distribution of profits, how losses are handled, exit strategies, termination for cause, the handling of breaches by either party, and governance of the business.
If You Are Considering Entering Into a Joint Venture, Our Firm Can Help You Through the Process
A joint venture can be a great way to get a new product to market or to expand your existing business. However, the process requires the assistance of a skilled attorney. The experienced business attorneys at Jones Gregg Creehan & Gerace, LLP, can help guide you through the process, helping you achieve your goals in a joint venture. Contact us today.