Joint ventures can be highly profitable when structured appropriately to suit the desired commercial outcomes. However, partnering with another business can be complex and problems can arise if not done right, says legal expert Lisa Psaltis.
With joint ventures it’s certainly not a case of one size fits all and there is no such thing as an appropriate "standard form" joint venture agreement. But in saying that, here is nine essentials that you have to be aware of when planning a successful JV.
1. Do a background check on your partner: When you commence a joint venture with someone, you are tying your reputation to theirs. The wrong joint venture partner can undo years of carefully accumulated good will in a very short time. Make sure that you undertake due diligence and check the credentials of the other party.
2. Decide on the objectives and respective roles at the start: Objectives and roles should be agreed and documented by both parties before any work starts on the actual joint venture itself. This remains important whether it is a start-up joint venture or another in a long line of successful commercial collaborations.
3. Formalise the agreement: Deal with as many aspects of the relationship as possible in the written agreement to help prevent any misunderstanding once the joint venture is up and running. Key matters that a written agreement should cover are:
- Structure of the joint venture.
- Financial contributions you will each make.
- Structure and make-up of the management team.
- Ownership of intellectual property created by the joint venture.
- How liabilities, profits and losses are shared.
- Dispute resolution procedure.
- Exit strategy.
4. Clear performance indicators: Establish clear performance indicators for each party to the joint venture. An imbalance in levels of expertise, investment or assets brought into the joint venture by the different partners can lead to conflict, even though those issues were known from the start. The best course is to document the contribution required and benchmarks to measure each partner's contribution.
5. Establish a good dialogue: Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. It’s usually a good idea to arrange regular face to face meetings for all the key people involved in the joint venture.
6. Keep up-to-date financial records: Maintain the financial records of the joint venture and auditing in accordance with the relevant legislation, government, corporate guidelines and general good business practice. Indeed the courts require that a party to a joint venture keeps such books and accounts as would permit the affairs of the joint venture to be assessed with reasonable facility and within a reasonable time.
7. Fiduciary obligations: With joint ventures, the question which courts have to consider most often is whether the arrangement constitutes a partnership and, if it does not, whether the relationship nonetheless gives rise to fiduciary obligations between the joint venture partners (that is, obligations to protect the interests of the other party). The answer depends on an examination of the documents and the relationship between the parties in each case. A fiduciary relationship may also arise in the course of joint venture negotiations on the basis that trust and confidence underlie the negotiating relationship.
8. Obtain legal, accounting and tax advice: Talk to your lawyer, accountant and financial broker, make sure they understand what you are trying to achieve, how you propose to achieve it and why. Take their advice.
9. Cultural clashes: Every organisation operates differently, includes different personalities and is accepting of different conduct. In short, there is potential for significant differences in culture between the joint venture partners. Ignore these issues at your peril. Cultural alignment, or at least a recognition and acceptance of cultural differences, is critical to the success of any joint venture.
Each joint venture will require careful analysis and a determination of issues critical to that particular project. While a properly structured joint venture will not guarantee success, it will reduce the risk of detrimental events that could hinder the venture’s successful operation.
Lisa Psaltis is a Senior Associate in the commercial litigation team at Colin Biggers & Paisley.
Follow @mybusinessau on Twitter for breaking stories throughout the day.
Find out why you should join the SME Association of Australia.