Access to new markets and customers, leveraging of existing knowhow, and the development and exploitation of new technology: all are really good reasons to start a joint venture with that new potential business partner your boss or sales people are so impressed with. Notwithstanding the exuberance of your co-workers, there are a few joint venture golden rules to follow on the front end which can make the difference between increased revenues and major headaches (and costs).
Dawda Mann has structured joint ventures and technology development agreements for its clients on three continents in a host of industries ranging from software, automotive, consulting, sales, and “green” emissions monitoring technologies. Follow these golden rules we’ve learned from our travels and that joint venture may just morph into the business opportunity of your dreams:
RULE #1: Call the company’s tax advisors and lawyers long before you agree to anything. Tax exposure and legal liability will be two of the biggest driving forces behind how any JV is structured. Depending on the size of the transactions involved, there can be millions of dollars at stake in structuring a joint venture properly, so tax and legal professional advice should be sought very early in the process, long before approaching the potential JV partner with any proposal.
RULE #2: Follow the K.I.S.S. principle. Keeping it simple when structuring a joint venture is hard work. Joint venture partners often have different business philosophies and systems. Those differences are magnified even further when your JV partners are from different countries and have different cultural expectations. However, joint ventures work best when the parties have clearly defined roles and it is easy to allocate costs, revenues and ownership. Leaner, simpler structures almost always lead to better, more profitable results. Consider having a trial period where the parties work together on a small project to determine where there may be efficiencies and pitfalls before diving into a long term arrangement.
RULE #3: Have a written Joint Venture Agreement and take your time preparing it. A joint venture is not the time to have the deal terms sketched out on a cocktail napkin or strung together in a bunch of emails between sales people. There are two broad categories of joint ventures: the contractual joint venture where your company and the JV partner enter into a contract between the two of you or a “new-entity” JV where the companies form a new company under joint ownership and control. Both types have their strengths, but there are significant differences in the level of risk exposure and potential liability your company may be facing. If not documented correctly, your company can easily find itself liable for the actions of its joint venture partner even when it had no knowledge or input into what caused the liability in the first place. (See Rules #1 and #2!)
RULE #4: No joint ownership of newly developed technology. The Joint Venture Agreement should be very clear that each party owns the intellectual property it brings to the relationship and it should spell out what limited rights, if any, the parties have to use the intellectual property and knowhow of the other party. But what happens if the parties or the new joint venture entity develop some new technology together? Who owns it? Who has the right to exploit it? Who pays the costs to maintain it? Do proceeds have to be shared if one party exploits or improves the new technology, but the other party does nothing? There are so many pitfalls inherent with the joint ownership of intellectual property that there is generally only one good piece of advice: Don’t do it. It is often sufficient for one party to own all of the new intellectual property while the other joint venture partner receives a broad and well drafted license to use the technology which gives them everything they need. Ownership of intellectual property is a complex issue that should be discussed with legal counselors and potential partners early in the formation process.
RULE #5: Know where the exit is and how to use it. A clearly defined exit strategy is an essential element of any Joint Venture Agreement, so the company can limit its exposure and protect its property and relationships if the joint venture sours. Work with your counselors to determine under what circumstances the company will want to be able terminate the agreement and what the rights and responsibilities of the partners are when that happens. Are there non-compete obligations that survive termination? Are payments due? What are access and use rights to proprietary data? Who “owns” the customer relationships and the intellectual property?
Joint venture relationships are complex, especially across borders, but following the rules above vastly increases the chances that your company will form strategic partnerships that stand the test of time and increase the bottom line.
By Scot C. Storrie