What is a Joint Venture Agreement?
A joint venture agreement is a business arrangement between two or more parties who work together to maximise profits by utilising each parties’ strengths. It can be used to achieve the same business goal, product or project. The agreement usually arises in two forms. The first is unincorporated through a contractual relationship and the second is incorporated through the creation of a JV shareholders agreement.
A joint venture may provide the perfect opportunity for you to capitalise on another business’ resources and expertise. In doing so, not only are you opening yourself up to new insights, but the risk and costs associated with a joint venture are shared between yourself and the other party. Whilst joint venture agreements do offer opportunity for growth, it can also lock you into an unfavourable partnership and leave you open to liability. It is therefore vital to have in place a joint venture agreement that is tailored to protect your interests.
What do I need to consider before entering a Joint Venture Agreement?
1 – Who your partner is going to be
Before any agreement can be discussed it is vital to first know with whom you are making the arrangement with. This is important because when you are engaged in a joint venture, your business’s reputation is now tied to that of your business partner. A bad partnership can mean that your business’ goodwill can be significantly reduced by that of your potential partner. This is especially important if your joint venture will likely take place over an extended period of time. It is therefore crucial to check the credentials and history of your potential partner. To answer the question of where to look, consider checking court records, credit histories or reviewing financial records. It is also important to note that your potential partner, if they are diligent, are likely doing the same checks on you. If you do have any skeletons in your closet, it is recommended that you fully disclose any to your potential partner.
2 – What is the scope of the Joint Venture Agreement?
It is extremely important that you clearly set out the objective of the partnership. This is usually done by negotiation between the parties. It is also crucial to establish what the relevant roles and responsibilities of the parties are i.e. what is each party contributing and how? The benefit of joint ventures is to partner with a business that is different from yours, however, because of the opposing expertise and resources, this can often lead to an unequal balance in responsibilities. That is why a clear articulation of the role of each party is necessary. This must be then documented in a written agreement signed by both parties.
3 – What is the structure of the Joint Venture Agreement?
It is very important that you and your partner agree on which structure the agreement will be in. It is also important to consider the liabilities of each party i.e. will it be shared or will one party be liable for one aspect of the agreement? It is these details that need to be agreed upon at the beginning of the venture in order to reduce your liability in the future. It should also be made clear that you are retaining and protecting your intellectual property. Similarly, it the agreement should determine how the intellectual property that arises during the venture should be divided between the parties.
4 – Exit strategy
Perhaps the most important aspect of a joint venture agreement is the identification of how the agreement will end. A withdrawal of an agreement without the consent of the other party can lead to costly litigation. If there are clear guidelines set in place in the event one of the parties decides to abandon the agreement, this may protect your interests in the future by preventing legal costs. For example, the guidelines will determine how the transfer of rights will occur between the leaving and remaining party. An exit strategy will also outline at which date the agreement will be terminated.
If you are considering a joint venture, you should engage a commercial lawyer to customise an agreement between yourself and your potential partner(s). Any joint venture can open doors as well as increase your liability, and having a formal joint venture agreement will protect both parties. At OpenLegal we specialise in commercial law and have drafted many joint venture agreements. We love working with small businesses and startups, so whatever the scope of your project, feel free to contact us if you need legal help.