Guide 6 min read
1. When to consider a joint venture
If separate businesses want to achieve a common goal, they could do this by forming a joint venture to share their expertise and resources. Joint ventures can be used by any size of business in any sector and are particularly useful in fast-changing sectors such as technology and sustainability.
● access to new markets and distribution networks
● increased capacity, e.g. in purchasing, research and development
● access to greater resources, including specialised staff and technology
● growth without having to borrow funds or look for outside investors
● leveraging of customer databases
● risk sharing.
Joint ventures are an option in various situations such as where:
● one business has intellectual property and patents but would benefit from the resources of another business in taking it to market
● a new product could be created and tested if two businesses combine their technology
● vertical collaboration within a supply chain could bring benefits, for example, a manufacturer working on a joint project with a distributor.
However, partnering with another business can be complex. It takes time and effort to build the right relationship. Problems can arise if:
● the objectives of the venture are not totally clear and communicated to everyone involved
● the partners have different objectives for the joint venture
● there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
● different company cultures and management styles result in poor integration and co-operation
● the partners don't provide sufficient leadership and support in the early stages.
2. Types of joint venture
The businesses collaborating on a joint venture remain separate organisations and there are two main ways to set this up.
● Drawing up a contract. This is a common approach for a time-limited project, such as creating and running an event together. In this situation there would be no need for the activity to be registered at Companies House.
● Creating a new legal entity co-owned by each of the parent businesses. This may be suitable for longer-term or more complex projects such as creating and launching a new product, building infrastructure, or servicing a long-term customer contract. The new entity remains separate from the parent businesses and various legal structures could be used, such as a limited company or partnership.
These approaches differ from mergers and acquisitions. In a merger, the businesses fully integrate, and in an acquisition, one business will take control over another.
The financial and legal considerations of the joint venture will depend on whether it involves a contract or the creation of a new legal entity. Professional advice is usually required by all parties.
The structure of the venture influences:
● the roles and responsibilities of key team members
● how any profits are shared and taxed
● the liability of each party if the venture is not successful.
3. Are you ready for a joint venture?
There are different reasons that a business may begin to consider a joint venture, for example:
● proactive strategic review - reviewing the business strategy prompts focus on specific goals, such as bringing a new product to market or operating in a new area, and a joint venture is considered as one way to achieve that
● responding reactively to a proposal - an opportunity presents itself, perhaps because another business approaches yours with a suggestion to collaborate.
It’s always helpful to look at what other businesses are doing, particularly those that operate in similar markets, and whether they are using joint ventures.
Before committing, ensure that a joint venture is the best way of achieving your business aim in line with your overall strategy. It should involve a proportionate amount of resources and attention, to avoid the risk of diverting too much from other essential areas of your organisation.
4. Choosing the right joint venture partner
The ideal partner in a joint venture is one that has resources, skills and assets that complement your own.
As a new venture will inevitably impact your employees, it’s also important there is a good cultural fit.
You should consider:
● How well do they perform?
● What is their attitude to collaboration and do they share your level of commitment?
● Do you share the same business objectives?
● Can you trust them?
● Do their brand values complement yours?
● What kind of reputation do they have?
If you progress to the next stage you need to carry out some due diligence:
● Are they financially secure?
● Do they have any credit problems?
● Do they already have joint venture partnerships with other businesses?
● What kind of management team do they have in place?
● How are they performing in terms of production, marketing and workforce?
Before you consider signing up to a joint venture, it's important to protect your own interests. This should include drawing up legal documents to protect your own trade secrets and finding out whether your potential partner holds intellectual property rights agreements. Also, it's worth checking to see whether they have other agreements in place, either with their employees or consultants.
Remember, even though you are working with another business, you will still have legal obligations and a duty to look after your own business interests. It is important to take professional and legal advice before signing anything.
5. Take care with competition law
A joint venture could be at risk of infringing competition laws, especially if it involves competitors collaborating on an activity.
The Competition and Markets Authority (CMA) supports collaborations where they offer more choice for customers and drive innovation and economic growth. However there can be a risk that joint ventures reduce competition between businesses. For example, if competitors agree to:
● restrict their individual sales through a market sharing agreement
● share sensitive data about activities not relevant to their collaboration
● collude to rig bids or prices for customer contracts.
If they break competition law, then as well as reputational damage, businesses can be fined and directors disqualified from managing a company or even investigated for criminal offences.
The CMA provides a checklist of dos and don’ts to consider when entering into any type of collaboration and a list of questions to ask your legal representative before drawing up contracts. Their ‘Cheating or Competing?’ website has further information on what sort of activities may break the law.
6. Create a joint venture agreement
The format of any agreement will depend on whether you are entering into a contract or setting up a new entity. But some key considerations apply to both:
● the structure of the joint venture, e.g. whether it will be a separate business in its own right
● the objectives of the joint venture
● the financial contributions you will each make
● whether you will transfer any assets or employees to the joint venture
● ownership of intellectual property created by the joint venture
● management and control, e.g. respective responsibilities and processes to be followed
● how liabilities, profits and losses are shared
● how any disputes between the partners will be resolved
● an exit strategy.
You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.
From the beginning consider how you would end the joint venture.
Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.
Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months' notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out.
The original agreement should also set out:
● how shared intellectual property will be unbundled
● how confidential information will continue to be protected
● who will be entitled to any future income arising from the joint venture's activities
● who will be responsible for any continuing liabilities, e.g. debts and guarantees given to customers.
Even with a well-planned agreement, there are still likely to be issues to resolve. Good planning and a positive approach to negotiation will help you arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards.
It is essential to get independent expert advice - contact your local Business Gateway as a starting point.