12 Mar 2019

Steps to consider when entering into a joint business venture

Embarking on a joint venture (JV) is a huge decision that should not be taken lightly, and due diligence should definitely be undertaken.

In theory these partnerships are designed to be profitable and act as a springboard to new markets and distribution channels. They can likewise bring a wealth of advantages such as sharing risks, costs and limited commitment if the joint venture is deemed to have a limited life span.

There is conversely a raft of risks associated with Joint Ventures which are important to assess before charging ahead. Determining whether your company is ready to take on a joint venture requires a robust review of your business strategy and a SWOT analysis to examine its strengths, weaknesses, opportunities and threats.

If your business is 100% ready to take on a Joint Venture, the next step is to take the time to select the right partner. You may consider competitors, suppliers or existing customers – or you might decide to link up with somebody new. Whoever you choose, there are certain criteria that must be fulfilled to ensure any risk is minimised.

If this is your first joint venture ensure both parties share the same outlook, objectives, vision and culture – the latter which includes ways of working, commitment to developing staff – and corporate social responsibility. Conduct your due diligence to ensure your potential partner’s business is financially secure. If you miss this step – you could be stuck with trying to work with somebody who has totally opposing views, risking the success you both wish to achieve.

Establish early on that both parties will inject the same level of commitment to the venture, maintain a degree of scepticism – and avoid being too trusting. Another critical success factor to consider is your new partner’s reputation with its customers and suppliers. Are you happy to take on that reputation? Is the other party happy to take on your reputation? Can you continue to build success based on these reputations?

Establish the rules

If you are satisfied that this is the way forward for your business, establish ‘the rules of the game’ and clearly define the roles and responsibilities of the key players to avoid any misunderstanding further down the line.

Now find a good legal firm and draw up the equivalent of a business ‘pre-nup’. This should include the specifics of what your agreement with the other party involves – as well as an exit clause if things do not work out. Failure to do this could be much more costly than the fee for getting this drawn up.

Other details that should be documented include stating how and when profits will be divided and be realistic when it comes to profit expectations.

In the same that most real-life marriages are not made in heaven and encounter their respective challenges, following these processes will maximise the chance of your joint venture holding its own as opposed to falling apart spectacularly.

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