The Joint Venture Mystery Unpacked

By Travis Townsend Jr.

One of my favorite issues to help clients with is piecing together a joint venture puzzle. The JV puzzle is usually presented to me with a phone call from a contact saying, “Travis, I have a fantastic opportunity to really grow my business in the XYZ industry by teaming up with Mega Company. They want to do a JV with us.” Then the game begins. Two businesses can usually see that they are “meant to be together” but they rarely know exactly in what way. Each party wants to seize upon the prospect of increased profit margins and expanded market share. However, each party is typically concerned about maintaining their autonomy, protecting their confidential information, and most importantly, they are concerned about getting a fair deal. Each of these concerns is warranted.

Engaging in a JV can be a beneficial strategic action, but there some key matters that must always be addressed and those matters are best addressed when doing so through careful consideration of the form the JV should take, and the terminology in the agreement that memorializes the arrangement. Some JVs may take the form of a new formal entity owned and operated jointly by both joint venturers. Such JVs connect the venturers at the hip with respect to all business done from the new entity and require an awful lot of trust. If the entity takes the form of a corporation there should be a thoroughly negotiated shareholders agreement between the venturers. If the entity takes the form of an LLC or partnership, there must be a well-drafted operating agreement or partnership agreement prepared, depending upon the form of entity. Other JVs take the form of a loose strategic alliance whereby the venturers remain wholly independent entities and simply agree to work together pursuant to a memorandum of understanding. These loose relationships permit the parties to maintain their autonomy while still working toward their joint purposes.

No matter the form, all parties engaged in a JV should take consideration of certain key issues related to any joint enterprise. Joint venturers should account for all liabilities resulting from the joint operations and determine how such liabilities will be distributed. Additionally, joint venturers must determine who will be the owner of any new intellectual property developed through the venture’s activities. Many times the efforts from joint work result in new ideas, new products and new service lines that may be very profitable going forward. A dispute about who owns the multi-million dollar concept that sprang from the joint venture could get ugly real quick. An area that is often overlooked despite being a key driver of joining forces is that of the money distribution. While a basic outline of how monies will be divvied up is always undertaken, venturers may omit to account for exceptional performance by one party or poor performance by the other.

Opportunities to join forces can be exciting. Joint ventures make the world go round. Just be sure that when you grab hands and walk down the road with someone, that you’ve discussed in detail where you are headed.