You have decided on a joint venture with a business partner, what should the JV agreement covers?
Coming to the details of the JV agreement early in the JV exploration process may diminish the initial enthusiasm of both parties but leaving it too late may lead to over optimism. It is best to keep a watchful eye on the finer details and where appropriate during the discussion, to cover some of the key grounds. This helps to regulate the momentum and ensure that both parties have some understanding of the complete terms on how they see each other in the JV relationship.
The 4 key terms that all JV should covered:
- What will each of you be doing?
This is the most fundamental issue for all successful JV and it is this that drives this JV. What is each party bringing to the table and would that be complementary or is there some duplication. It is important to have a good understanding of the value quantification of what each party is doing and identify any overlaying processes, so as to maximise the leverage effect of the JV and avoid any potential conflicts. Early agreement to the value of each party’s role aligns the expectation of how to split the pie. It is vital that if one party is doing the operation and another on the sales, these are spelt out clearly. Either party must also have an agreement of the value of each party and consequently, how this value add would be shared between the JV partners.
- Who owns what?
The JV may involve the injection or the subsequent creation of assets both physical assets (eg machinery, buildings, products etc) and non-physical intellectual properties eg branding, customers, patents, copyrights) by the JV. The assets of the JV may be separately owned by each party or if jointly owned by both parties, the share of each party in each asset. This avoids unnecessary tensions in assets split when the relationship went sour.
- Will there be an end date for the JV?
Each party is likely running its own other business in addition to the JV. Keeping specified milestone throughout the JV period helps in resources planning (eg personnel, management involvement, dollar investment) and ensure this necessary resources are set aside in advance by each party. A JV relationship may not last forever as it is likely that a successful JV would evolve into a more sustainable business structure out of JV, but the business relationship between the JV parties is what will endure beyond the life of the JV.
- What if one party needs to end the JV?
Inevitably, as much as any intense love of the JV partners during the initial and thereafter the stabilization stage of the JV, one of the partners may for whatever reasons wants it out. It is vital that this understanding of how to terminate the JV be agreed way before the potential happening of parting event. This parting of ways should cover whether what are the circumstances that either party can exit and how should that be done as well as the calculation of exit value (or costs). This is a challenging topic and you will never get a right exit value. The crux of the matter is not what is right but what is fair and equitable for the you and your JV partner. Point to note that whatever exit clause no matter how water-tight legally, is of little value if its intent is to wield onerous penalty to the exiting party. You cannot prevent a party from leaving a JV, and a more amicable solution is for an exit clause that provide for the possible exit that is acceptable for the remaining JV partner (if he wishes to continue running the JV alone or with another new partner) as well as palpable not to punish the exiting partner. It is better not to remain in a bad relationship than to end up in a situation when both have no choice but to continue to be together or ended up in a bitter split.