As your business is on the verge of expanding, the idea of joint venture may be appealing to you.
These need-to-know basics should help you consider whether a joint venture is right for you and your business.
by Jim D, Former SBA.gov moderator
What is a joint venture?
A joint venture is when two or more businesses enter a temporary partnership. This partnering is usually associated with a specific contract or product that it is mutually beneficial to both businesses.
Partnerships may be formed for a variety of reasons.
- A business may hold a specific patent or process that another business wants to utilize.
- A business may have market penetration in a special area.
- Both businesses may have complementary products.
Whatever the reason, there are some things you need to take into consideration before entering a joint venture.
When should I consider a joint venture?
You should consider a joint venture when it is mutually beneficial for you and your partner. This can be difficult to determine because you and your potential partner will be negotiating the terms of the joint venture agreement.
Some questions that you need to consider are:
- What am I getting out of the joint venture?
- What am I giving up to be in the joint venture?
- How does this joint venture position me for the future?
- Are the terms fair or does one business has the upper hand?
- Are my business and my busines;s intellectual property protected during and after the joint venture?
If you feel comfortable with all the answer to these questions, then you may be ready to enter a joint venture.
When should I not consider a joint venture?
Like all decisions, there are risks associated when starting a joint venture. Joint ventures may seem like a good idea to move your business into a new market or expand your capabilities, but you need to consider the relationship you have with the other business owners and managers.
Most businesses are self-interested, meaning that they make decisions that are in the best interest of the business. If two businesses entering a joint venture have different goals or both have unrealistic expectations, the joint venture can become more of a burden than beneficial.
For example, if your business created a new product and held the patent and you were looking to create a joint venture to expand into a new market, you need to be upfront with what your intentions are. Are you going to try to use the other business for their access into the market and then drop them? Are they just trying to get your patent and then drop you? These are fundamentally different goals. Both businesses are trying to take advantage of each other. This joint venture can fail costing both businesses money and time.
If you do not feel like the joint venture has your best interest in mind, you need to think twice about it. It is easier to walk away in the planning stage than after the joint venture agreement is signed.
How to start a joint venture
If you feel that the joint venture will be mutually beneficial, you will need to make the joint venture legal. If both businesses are located in the United States, you will need to sign a joint venture agreement. You should contact a small business lawyer to help draft the joint venture agreement.
If you need some help picking a small business lawyer, read Need a Lawyer? How to find Legal Representation for Your Small Business.
How to make joint ventures successful?
Making a joint venture successful takes communication and proper motives. Many joint ventures fail before the joint venture agreement is signed. This is due to the communication need to finalize the agreement. Both businesses need to be open on what they feel that should be getting as well as what they are willing to give up. As a business owner, you will need to be a little selfish and make sure your business is not being taken advantage of, but at the same time not take advantage of the other business.
Having a joint venture agreement that you agree with and your partner agrees with is the most important part. This is the legal document, so if there is room for interpretation you may be in for a rough partnership.
If the circumstances change once the joint venture has started, it is better to be open and discuss those with your partner. If you fail or they fail, the partnership will fail, hurting everyone, so it is better to look out for each other.
This article was first published on December 15, 2010