5 Common Mistakes When Entering into a Joint Venture
Working with another company can be one way to grow or diversify your own business. A joint venture is like any commercial relationship. Having the appropriate legal agreements in place ensures both sides are clear on their role and responsibilities. A joint venture can provide;
- more resources
- greater capacity
- increased technical expertise; and
- access to new markets and distribution channels.
However, entering into a joint venture is a major decision, and if there aren’t well-thought out procedures and contracts in place, mistakes can happen. Below we have listed the 5 most common errors that can happen when entering into a joint venture.
1.Both Partners Wanting Full Control
Many joint ventures fail because the partners are accustomed to having control over their own companies. As a result, compromising about how to run the joint venture can be a struggle for those involved. If the struggle for control isn’t dealt with appropriately, it can lead to major problems further down the line.
One good idea to combat the struggle for control is to appoint a board of directors with representatives from both companies to make decisions about how to run the venture. For example, the joint venture agreement could determine which decisions can be made by management and which decisions require approval from the board or shareholders.
2. Different Values and Ethics
A majority of joint ventures fail because the partners are not the “right fit” for each other. They may have different visions of purpose and their roles. For example, when two company cultures are combined into one venture, company pride can lead to unproductive arguments about using one company’s tried and tested methods over another.
This can lead to a breakdown in communication, effective management and possibly even a breakdown of the joint venture. By doing sufficient research on the company’s culture beforehand, this can help save for any nasty surprises in the future.
3. Insufficient Planning
Insufficient planning is a leading cause for many join ventures failing. Too often, a joint venture “plan” consists of very simple statements of each party’s intended contributions to the venture and their respective share of the profits. This is often done without outlining the key provisions for governance, dispute resolution, ownership of jointly-developed assets, such as intellectual property; and the terms and conditions for the termination of the joint venture.
4. Different Profit Expectations
Joint venture partners naturally want to see profits from the venture as quickly as possible, but distributing profits is rarely as simple as giving each party a share proportionate to their ownership.
The joint venture agreement should lay out how and when profits will be distributed and the order of priority in which the profits will be distributed to prevent fallouts and dispute.
5. Lack of a Proper Contract
The success of a joint venture highly depends on thorough research, clear responsibilities and a clear understanding of objectives. For example, how long will the joint venture exist, what will you do with any assets or equity and who controls what. Shares, revenue time and investment will require some thought too. Since joint ventures can be arranged in different ways, both parties need to agree on which best suits their interests and have it put into a clear, agreed-upon contract.
When entering into a joint venture, make sure there is a clear distribution and assignment of leadership roles between all the parties involved. This way, you will be able to avoid any risk of power struggles that may affect the joint venture’s overall profitability.
Before entering into any form of agreement, talk to one of our experts. Our lawyers are amongst the best in the UK and we will ensure your interests are documented and protected in the proper way.
Our Partner and Head of the Commercial Law Department, Matthew Inman is extremely experienced in providing expert legal guidance to business owners, contact us today on 01724 854000 so we can help you to make the most of your new venture.