A joint venture can offer two or more businesses the opportunity to pool their resources and share their expertise to accomplish a particular objective. The manufacturer of a product might be presented with an opportunity to bid on a large contract requiring a substantial amount of raw materials. Purchasing the raw materials on the open market might require a huge expenditure of capital, so the manufacturer might approach the supplier with a proposal to combine their respective resources through a joint venture agreement.
The contents of a joint venture agreement will depend upon the facts and circumstances of the joint venture and the needs of the parties. Here are five things you might consider for inclusion in your joint venture agreement.
Be specific about the contribution each party is making to the joint venture
When two companies get together in a joint venture, each one might be contributing something other than money. The joint venture agreement should clearly state what is being contributed by each participant. For example, if one participant is supplying raw materials while the other party is going to manufacture a product from those materials, then the agreement should specify the amount of the raw materials that will be needed and to produce a specified number of items.
State how long the joint venture will last
The end of the joint venture might be stated by a date. Depending upon the circumstances, it might be better to state the termination of the venture by referring to fulfilling a certain number of orders or by some other quantifiable measure.
Specify the division of profits and losses
It should not be assumed that profits and losses are being divided according to the financial contribution of the parties to the joint venture. Make it clear in the joint venture agreement how each of the following will be divided:
- Management responsibilities
- Ownership of the products resulting from the joint venture
Anticipate problems before they arise
It's easy to talk about making money and having a successful joint venture, but you also need to discuss what could go wrong and what will happen when it does. The joint venture agreement should have contingency plans written into it in the event any of the participants cannot perform their obligations.
Conflicts will happen, so cover their resolution in the agreement
Disagreements and conflicts will invariably arise during the course of even the most carefully negotiated and planned joint venture. When conflicts arise, the best thing for the parties and for the success of the venture is to resolve them quickly and efficiently. You might wish to include a mediation or arbitration clause in your joint venture agreement to avoid lawsuits or long, drawn out disputes that could jeopardize the success of the enterprise.
The success or failure of a joint venture can depend on the time and energy the parties put into their joint venture agreement. Anticipating problems that might arise and addressing them in the agreement is the key to a successful enterprise.