Writing your way through joint venture

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I recently had two people in for counseling, and both were asking about a joing venture for their companies because their businesses were losing market share.

One had 80 percent of their business with one customer; and the other had 65 percent of their business with a single unique product. Both situations could create major problems for their companies if their clients had a change in purchasing patterns.

They both talked about joining with another company with a different product and customer base to utilize each other's manufacturing base, expertise and markets.

A joint venture typically involves two [or more] companies teaming up to develop a product, engage in research and develpoment, start a line of business, enter into a cooperative marketing or distribution arrangement, or some other mutually beneficial transaction.

Joint ventures can be done in a number of ways. Both sides can set up a separate company with the two sides a s shareholders. Or it can be a contractual arrangement in which the contract sets out the rights and responsibilities of the parties.

JVs can be complicated and fraught with peril, like jumping into a pond filled with alligators inan attempt to rescue your daughter. Joint venture agreements can be complicated with many issues, but they don't need to be. Here are some keen points to consider:

  • Structure: What form will the JV take, a separate entity such as a corporation, partnership, Limited Liability Company [LLC] or just a contractual agreement?
  • Purpose: Does this agreement clearly set out the purpose of the JV? This step is really important - you don't want any ambiguity here because it can sneak up on you when you least expect. You also need to make sure that the JV's purpose is not so broad that it adversely affects the core business of either firm.
  • Term: How long will the JV last? Does the agreement include renewal rights? What circumstances can one party use to terminate the JV? You need a "bozo" clause: Your JV partner doesn't do what it has commented to, so you can end the JV.
  • Contributions: The agreement needs to spell out each side's contributions, either in cash assets, patents or whatever. Also, how does the JV plan to take care of the needs for additional money in the future?
  • Obligations: What willeach partner do? This is extremely important and needs to be clearly defined, not just implied. If not done correctly, the JV is doomed to failure. What maximum dollar amounts can each partner commit to without joint signatures? Who's responsible for what? Spell it all out.
  • Decision-making; Does the JV agreement detail how major andminor decisions are to be made? How much latitude is available to each partner before joint signatures are required? How are disputes resolved? Does one handle manugacturing and the other sales and marketing?
  • Profits: How will they be split? Will one party get priority return on theprofits or reimbursements of certain expenses before profits are distributed?
  • Special rights: Does either party get any special rights? What happens when it's time to end the JV? Is there intellectual property that has been developed by the JV? How are the assets to be divided? What's the scope of any special rights?
Best Advice: Write down all your concerns andcontributions to the proposed JV, write a draft of what you want and then get a good lawyer to help think through the issues and protection needed for each party. Remember, both parties need to be winners to succeed.

Bill Bryan is a counselor with the Service Corps of Retired Executives. SCORE offers counseling, workshops and seminars on small business operations. You can reach Bryan through SCORE, 515 N Court St. 815-962-0122, for information and appointments.


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