How to Structure a Joint Venture
A joint venture is a strategic agreement between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project, or a continuing business relationship.
Here are some steps on how to structure a joint venture:
- Identify the Purpose: The first step in structuring a joint venture is to clearly identify the purpose of the venture. What are the objectives and what do the parties hope to achieve from it?
- Choose the Right Partner(s): Choosing the right partner(s) is crucial. They should bring complementary skills, resources, and markets. It’s important to conduct due diligence on potential partners to understand their financial standing, reputation, and how they conduct business.
- Determine the Structure: Joint ventures can be structured in several ways, such as a new business entity (such as a corporation or partnership), a contractual agreement, or through a joint venture agreement in which each party’s responsibilities and shares are explicitly stated. The structure will largely depend on the legal and tax considerations of the parties involved, as well as the nature of the joint venture itself.
- Draft a Joint Venture Agreement: A joint venture agreement outlines the rights and responsibilities of each party. This includes capital contributions, division of profits and losses, governance structure, operational roles and responsibilities, exit strategies, dispute resolution mechanisms, and more. It’s essential to seek legal counsel when drafting this agreement to ensure all parties’ interests are protected.
- Create a Management Structure: Define a clear management and governance structure for the joint venture, including how decisions will be made, who will be responsible for the daily operations, and how each party will participate in the governance of the venture.
- Financing the Joint Venture: Determine how the joint venture will be financed, including the initial contributions of each party and provisions for future financing needs.
- Prepare an Exit Strategy: From the outset, it’s important to define how and when a party can exit the joint venture, what happens in the case of a deadlock or disagreement, and what the procedure will be for the dissolution of the joint venture.
It’s important to remember that structuring a joint venture can be a complex process that involves legal, financial, and operational considerations. Therefore, it’s always a good idea to consult with legal and financial advisors when structuring a joint venture.
Example of How to Structure a Joint Venture
let’s create a hypothetical example of structuring a joint venture between two companies: “TechStart Co.” (a tech start-up with an innovative software product) and “GlobalSoft Inc.” (an established software corporation with a wide market reach and robust distribution channels).
The goal of the joint venture is to enable TechStart Co. to leverage GlobalSoft Inc.’s distribution channels to reach a broader audience, while GlobalSoft Inc. gets to add a groundbreaking product to its portfolio.
- Identify the Purpose: The purpose of this joint venture is to market and distribute TechStart Co.’s innovative software product using GlobalSoft Inc.’s established distribution channels.
- Choose the Right Partner(s): TechStart Co. and GlobalSoft Inc. make good partners because they have complementary resources. TechStart has an innovative product, but lacks the marketing and distribution resources, while GlobalSoft has a robust market reach and distribution resources, but needs innovative products to stay competitive.
- Determine the Structure: They decide to form a new corporation for the joint venture, “InnovSoft Corporation,” allowing both parties to have equal shares and control.
- Draft a Joint Venture Agreement: They work with legal counsel to draft a joint venture agreement. The agreement includes each party’s initial capital contribution (TechStart contributing intellectual property, GlobalSoft providing the initial monetary investment), profit and loss sharing (agreed to be equal), each party’s operational roles and responsibilities, and provisions for dispute resolution.
- Create a Management Structure: InnovSoft Corporation will have a Board of Directors composed of an equal number of representatives from each company. The daily operations are handled by a CEO chosen by the board.
- Financing the Joint Venture: GlobalSoft Inc. agrees to provide the initial cash investment to get InnovSoft up and running, while TechStart Co. contributes the software product as its share of capital. Future financing needs will be shared equally.
- Prepare an Exit Strategy: The joint venture agreement states that either party can exit the joint venture after five years with a year’s notice. In case of a deadlock, they agree to bring in a third-party arbitrator. If the joint venture is dissolved, assets will be divided according to each party’s capital account.
Remember, this is a simplified example. In real-world scenarios, forming and managing a joint venture can be much more complex and typically involves various legal, financial, and strategic considerations.