Articles and opinion
As companies consider their growth strategies, we are seeing a marked move towards the popularity of joint ventures. With the continued restricted availability of investment capital, it is easy to see the attractions.
Rosalyn Breedy, Managing Partner of Breedy Henderson Solicitors outlines the pros and cons that entrepreneurs need to consider, in particular the key legal risks that you will need to address.
What do we mean by a joint venture?
A joint venture is an ongoing partnership or strategic alliance. It is a relationship implemented by a contract or through a separately incorporated joint venture vehicle. It is usually expected to last between three and five years.
The joint venture differs from a merger or acquisition deal which is transactional in nature. In a merger or acquisition, the object of the parties is to extract as much value from the other whilst accepting as little risk as practicable in the knowledge that the relationship is going to end. Inevitably, transactional deals favour the larger party who in most cases has the greatest negotiating power and ability to hold out during a negotiation.
Successful joint ventures can be a very effective method of achieving accelerated growth by helping you reach more markets and gain access to additional capital, resources, competencies and technologies. This is important during a time of little access to capital.
Doing an alliance deal with a major player can boost your reputation by association.
A further benefit is that a joint venture can be a clever method of ensuring an excellent tax efficient planned exit. Your partner gets to know your business and is able to bid an appropriate price, with less reliance on an extensive and expensive due diligence and deal process. Your partner will be happier to let you have input into the structure of the deal, which means you can make it more tax efficient. To cap it all you will feel happier about agreeing to an earn-out if your business is ultimately acquired because you will have a good working relationship with your partner.
What are the key legal and business risks?
Clearly it is important to find the right partner for you joint venture. Research shows [ can you provide source] that joint venture and partnerships need either to be very profitable or to leapfrog your business in an exceptional manner to warrant the work and time they require to execute.
Careful thought needs to be expended in understanding the intellectual property and key value drivers of your business to avoid giving away the shop. Once that exercise is completed, protect yourself by physically keeping non-joint venture assets separate. Protect shared assets by means of a licence and a confidentiality agreement and ensure that your employees follow what you have agreed on disclosure.
Avoid difficulties in working together which inevitably arise when you have a partner at a larger company by taking the appropriate amount of time to agree governance, operational frameworks and the process for day to day decision making.
Document your agreement carefully and, if you are an SME, be careful about legal advisers who are used to working on joint ventures between large companies. Large scale joint venture agreements usually contain clauses such as ‘Russian roulette’ or ‘Texas shoot outs’ which force one party to buy the other out. They sound fair, until you realise that they favour the joint venturer with lots of available capital which may not be you. They can mean that you are forced to sell your business at a low valuation several years on because you can not afford to buy the other party out.
Think about the termination and the possible means of falling out before you start. How will you resolve disputes and ensure fair value on distribution of assets?
Of course, we can advise you on all of these aspects of the joint venture.
When not to enter a joint venture?
Consider whether you could achieve this growth alone. Do you already have the assets required? Could you train your people or reconfigure your business model?
Even if you have to go outside, could you just buy additional resources or employ new expertise?
Don’t forget doing a joint venture means sharing the upside too!