10 Ways to Avoid a Joint Venture Fail

10 Ways to Avoid a Joint Venture Fail

10 Ways to Avoid a Joint Venture Fail

Joint Ventures are great for collaboration

Working together with another like minded entrepreneur is a clever way to accelerate business growth, which is why joint ventures remain a popular way for individuals or organisations to collaborate. But before you ‘Give it Away’ (as there’s always room for a Red Hot Chilli Peppers reference in a legal consideration blog), it’s critical to shore up your joint venture’s credentials to ensure a smooth, surprise-free partnership from beginning to end. In this Onyx Legal blog , we highlight 10 ways to avoid joint venture fails. [Ok, so we ended up with 11 – Ed.]

Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time.

1. Who is party to the joint venture?

Establishing a joint venture is no time to be carefree with the details.

Before entering into a joint venture, establish the legal identity of all parties. This means performing ABN and other similar regulatory checks. It might also mean checking driver’s licence details of individuals. 

A client recently came to us with a proposed joint venture, and we could not establish who would pay him the $400k that he expected to receive as his share of profits. The deal fell over when the other party also failed to establish who would pay that sum.

2. How Should You Structure a Joint Venture?

It is important to understand that joint ventures and partnerships are different structures.

A partnership is a long-term working proposition with full legal liability – a commitment to working together into the future.

A joint venture is project or purpose-focused, and facilitates separate parties to continue working on other businesses simultaneously. Joint ventures can be done by contract with each party paying their own tax, but one of the parties must hold the assets relating to that venture (paperwork, accounts, assets) unless it is established in its own identity.

3. What do you want to achieve with your joint venture? 

It’s easy to get caught up in the potential of success and innovation at the beginning of a joint venture, which is why understanding what you want to achieve from the collaboration is so valuable.

We’ve observed web designers, marketers and programmers enter joint ventures expecting to receive a share in profits at the end of the build, only to have ‘goal posts’ moved so regularly they exit the venture – leaving thousands of hours of unpaid labour in their wake.

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment.

Put together a clear written agreement covering all the moving parts of your proposed joint venture, and allowing some flexibility for change as your venture grows. 

have a written Joint Venture agreement

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment

4. How long should your joint venture last?

How long is a piece of string?

There’s no single answer to this question; the duration of your joint venture is based on the purpose of the project.

Will you be building something – a house or a piece of technology?

Are you going to be running a developing a piece of software or an education program together?

If you are building or developing something together the period of the joint venture might be the development period, and once you have a completed MVP (minimum viable product) you might roll it over into a company and start building a team to run it. 

Where you’re entering a revenue share deal, it might be a two year focused time frame for growing the base income of the business. 

Whilst you do not need to define a hard ‘end date’ to your joint venture in documentation, it’s useful for all parties to understand the purpose of the relationship, and a general timeline to completion of the project, and what completion looks like.

We regularly write in rolling successive terms, such as a one year agreement that rolls over for another year unless someone terminates before the end of the year. 

5. How can disagreements be dealt with or avoided? 

A joint venture agreement should be robust, providing options should parties fail to perform their role, or decide to walk away from the project.

In collaboration with your lawyer and with your project’s specific risks and opportunities in mind, carefully identify pressure points that require clarification and consider an approach to realistic exit should your working relationship end unexpectedly before the project is completed.

Good joint venture agreements remove the element of surprise from projects, leading to higher rates of completion and reduced conflict.

For a two party joint venture, it is a great idea to have some way of independently breaking deadlocked decisions. You could use a trusted third party as a referee, such as a mentor or board adviser. You could also allocated areas of decision making to each party that give one person a try breaking vote on those issues.

6. What if someone wants out if the joint venture early?

Build the possibility of a party leaving the joint venture into the structure of the joint venture to avoid future problems.

The best laid plans of mice and men often go awry, and a party may need to exit the joint venture for any number of reasons. Family life may be under pressure, there could be financial considerations, or health issues to address.

Fairness is key when devising a graceful exit from a joint venture. 

7. What if you want someone else to join in the venture part way through? 

Joint ventures can be created to allow for the possibility of other experts parties joining the project. Sales professionals are typically invited to join in after an MVP is achieved. 

It’s important that you’re working with a lawyer to structure your joint venture for all possible contingencies … which could  include growing your collaborative group.

8. Who will do what in your joint venture?

Formalising a joint venture is no time for pussyfooting around responsibilities or making assumptions about role workloads.

Success in your project relies on clear delegation of work, as all parties will have other responsibilities that could take their attention, in addition to the joint venture.

It’s important to know exactly who will be paying the bills and who will be responsible for particular milestones.

Having difficult conversations early on about the work or outcomes due for completion by exact parties of the venture will save plenty of strife when life gets busy or timelines become blown-out. 

9. What happens if someone fails to live up to their responsibilities in the joint venture?

As with any project, it’s possible that the whole thing could become scrambled eggs.

Of course you don’t anticipate that will be the outcome, but it’s prudent to plan for unlikely circumstances. Think about COVID-19, a virus which has changed the trajectory of the global economy in the space of months. It was nigh on impossible to imagine the world shutting down a year before the corona virus; but there it is.

People can fail to live up to the responsibilities in a joint venture for a variety of reasons, including circumstances beyond their control.

Build into your joint venture contingencies around ‘failure to perform’ and decide what the dissolution of the relationship should look like. Who gets what? What will trigger the dissolution? How will any debts be paid?

These are important matters to discuss with your collaborative partners and your lawyer.

10. Who retains any intellectual property created during the venture, once it ends?  

Often a complex matter to consider, the ownership of intellectual property is the cause of many disagreements.

If the joint venture does fail, there is likely to be an argument about intellectual property and who owns what. If you can work out IP ownership at the commencement of your joint venture, you’ll design a logical way of dealing with the matter if you fall out.

Maybe each party only walks away with what they contributed; maybe each party walks away with one complete copy of the created intellectual property.

Certainty around what will happen at the time of the exit gives everyone confidence and reduces the risk of legal action. 

11. How will the project be managed?

A joint venture teaches entrepreneurs a whole lot about project management and communication. There are many moving pieces you and your partners will need to consider:

  • planning
  • stakeholder relationships
  • reporting
  • regular meetings and agendas
  • cashflow 

While it is appropriate for different roles to be attributed, a single party needs to be appointed to ensure accountability across the whole of the joint venture. You will need someone with the energy and drive to ensure that things happen. 

Flexibility must be built into this role, and an allowance to break ‘deadlocks’ in decision making.

Many’s the time we have observed joint ventures fall apart when the directors of the governing entity failed to design a mechanism for change, independent of the warring parties. 

Joint ventures are a terrific way for business owners to collaborate, to stretch their skills, test ideas, and to innovate. A well-designed joint venture allows for the clear division of work and responsibility, provides safeguards for failure and disappointment, and deals with the sticky stuff of business relationships before they become complex.

At Onyx Legal we support business owners to come together with like-minded partners in joint ventures, creating structures that respond to your unique projects, packed with safeguards to keep you as confident and safe as possible.

Our key takeaway for joint ventures?

Think on it.

Clarity at the beginning of a project leads to better results in a joint venture, and the chance everyone will meet or exceed their expectations. 

How can Onyx Legal help you?

Joint ventures have a contractual foundation.
You can form a joint venture with a handshake, or you can put a little thought into your expectations and negotiate an agreement that clearly sets out each party’s rights and obligations, as well as exit opportunities. We also highly recommend incorporating sensible dispute resolution mechanisms that will support the joint venture moving forward. If you are already in a joint venture, we can review the contract and clarify any legal rights and obligations you don’t understand.
Joint Venture Advantages and Disadvantages

Joint Venture Advantages and Disadvantages

Joint Venture Advantages and Disadvantages

What is a Joint Venture?

Possibly your first question will be “What is a joint venture?” and then possibly “How is that different from a partnership?”. And yes, it is commonly referred to as a “JV”, but first question first.

A joint venture is an alliance between parties for mutual benefit. Still doesn’t really explain things, does it?

Where different companies that might not even be in the same industries see an opportunity to work together for mutual benefit without giving up any of their core business, that is a joint venture.

Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time. They allow each of the parties to leverage the resources, technology, finance or markets of other parties, for mutual benefit.

Property developments are often completed by joint ventures, where each party contributes different resources or expertise to complete the project. One party might have all the knowledge necessary to set up, manage and complete the project, another party might own the land and the third party might be a builder. By forming a joint venture, they all limit their risks to the areas where they have knowledge and experience and get to participate in a project that would otherwise be out of their league.

Telecommunications companies might form joint ventures to construct and use infrastructure that is costly to build and maintain and would otherwise be underutilised. They each gain access to a necessary resource, but at a reduced cost.

Its also common for joint ventures to form between foreign companies wanting to break into a new market where there is an allied provider who already has their customers in that territory. Consider a home and contents insurance company that teams up with a car insurance provider in a market where they don’t currently have a foothold, being able to increase the variety of insurance products offered to the car insurer’s customer base.   

Joint ventures can involve more than two parties and can involve different types of entities, such as a mix of individuals, companies and trusts. There is no specific formula. Some joint ventures are formed by contract and some are formed as companies where each joint venture party owns shares. An incorporated joint venture is more likely to become a saleable asset in the future than an unincorporated joint venture.

Famous Joint Ventures You Might Not Have Heard About

Some recent international joint ventures include the following:

Haven – This health care focused joint venture was formed in 2018 between Amazon, Berkshire Hathaway and JPMorgan Chase. Think about the benefits each party might be contributing to the venture. Amazon has amassed huge amounts of data on consumer spending and is increasing its data collection into our homes with Alexa and Amazon Prime. Berkshire Hathaway has been around for 180 years accumulating incredible knowledge and experience in operating successful businesses and understanding market changes. JPMorgan Chase is an investment bank. The stated goal of Havel is to simplify insurance benefits, improve healthcare services and reduce the cost of health care services and prescription drugs.  

Self-driving cars – Google’s Waymo self-driving division has joint ventured with Jaguar Land Rover and Chrysler rather than building cars themselves and the car manufacturer doesn’t have to start its self-drive tech from scratch. Volvo and Uber, Honda and General Motors’ Cruise Unit and most recently, Hyundai and Aptiv have teamed up, all for similar reasons. Predictions are that the motor vehicle industry will be dominated by tech companies in the not too distant future.

Cosmotec – is a joint venture between the Sumitomo Corporation Group and a Brazilian based cosmetics company, with a view to gaining access to one of the world’s largest cosmetics markets.

Joint Venture Examples

For small business we see a lot of joint ventures where parties collaborate to develop a product or service they couldn’t offer on their own. Some very common joint ventures include collaborations between:

  • software developer + industry expert
  • web or app developer + industry expert
  • digital marketers + tradies
  • digital marketers + professional services
  • digital marketers + any business that needs leads
  • salesperson + any business that needs to convert leads
  • professional onboarding or training + any business with a high demand for bringing on new staff
  • international company + local distributor
  • industry expert + allied industry expert
  • property owner + property developer
  • financier + any business needing capital

We’ve already talked about some joint venture examples, so perhaps we should also look at the characteristics of a joint venture, or examples of the kind of provisions you’d expect to see covered in a joint venture agreement.

Governance/ Setup

  • there is usually a joint venture agreement setting out each party’s rights and obligations, as well as what will happen to any venture assets at the end of the project
  • the proportionate interests of the parties are described in the joint venture agreement, sometimes 50/50 and sometimes a different proportion
  • the joint venture agreement should set out how decisions will be made and any deadlocks broken and also provide for prompt dispute resolution to avoid holding up the project

Control

  • each party has a proportionate interest in the revenue or profits of the joint venture, but that may be different from their level of authority in decision making – investment partners are sometimes silent partners to a joint venture, meaning they don’t have a say in how the project is conducted
  • each party to a joint venture continues to control and operate their own business independently to the project
  • transactions may be recorded separately by the parties involved and invoiced back to the venture, or accounts will be maintained so that each of the joint venture parties can separately account for their contributions and any distributions they receive

Termination

  • what happens to the assets of the venture, particularly intellectual property when the project ends?
  • are the parties restrained from competing with the joint venture for a period?

What is the Difference Between a Joint Venture and a Partnership

Partnerships are generally long-term whole of business ventures whereas joint ventures are often project specific side gigs. In a partnership you also agree to take full responsibility for the partnership liabilities, whether you created them or not, and even if you didn’t know they were created by one of the other partners.

We generally discourage people from calling a party a joint venture partner or calling their venture a joint venture partnership. In fact, we prefer joint venture and partnership not to be mentioned in relation to the same project.

Some comparisons between a joint venture vs partnership

Benefits of a Joint Venture

The benefits to a party in a joint venture will depend upon their goal in entering the arrangement in the first place. Some common benefits of joint ventures include:

  • business diversification
  • entry into new markets
  • new distribution channels
  • leverage expertise of another party
  • flexibility
  • limited scope
  • defined risks
  • defined rewards
  • potential to create saleable asset
  • reduced costs
  • economy of scale
  • strategic information sharing

Risks of a Joint Venture

One of the scariest parts of going into a joint venture for small business owners is that the other party won’t be as committed to the project as you are, and you end up doing everything yourself. We’ve seen it happen.

One of our digital marketing clients stopped joint venturing when they realised that they were doing everything for the venture and the other party was sitting back and doing nothing. Our client had the team and the methodology and the impatience to get things moving, but each joint venture became a project where they should have simply been paid for their digital marketing services and ended the relationship after delivery. While we were able to exit them from all agreements without too much fall out, it put their business back 12 months and impacted their revenue goals.

Your main risks are the same as any business venture, loss of time, loss of money, loss of trade secrets or other intellectual property, loss of staff and reputational risk. Weigh up the benefits against the risks, mitigate your risks and consider your options. 

How can Onyx Legal help you?

Joint ventures have a contractual foundation.
You can form a joint venture with a handshake, or you can put a little thought into your expectations and negotiate an agreement that clearly sets out each party’s rights and obligations, as well as exit opportunities. We also highly recommend incorporating sensible dispute resolution mechanisms that will support the joint venture moving forward. If you are already in a joint venture, we can review the contract and clarify any legal rights and obligations you don’t understand.