How to Create a Joint Venture

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A joint venture (JV) refers to any collaborative undertaking in which two or more entities pool their resources to attain a common objective. Joint ventures can range from a mere contractual relationship between two independent companies sharing direct or indirect control over pooled assets to a new entity created through asset contribution from each parent organization. Joint ventures are not mergers; hence most JVs preserve some form of competition among the participants.

Determine why entering into a joint venture is desirable for you. The reasons might include: cost sharing in an expensive capital investment, risk sharing in a speculative venture, technology transfer, expanding customer base, entering new markets, acquiring an expensive business concern or bringing change to your organization.

Identify your joint venture partners based on your reasons delineated in Step 1. For example if you want to enter a new market, look for partners with a strong standing in the target market.

Negotiate the capital structure and the legal form of the joint venture with the partners. Joint ventures can take three basic legal forms: contractual alliances which rely on simple contracts to clarify cooperation issues among partners, partnerships which are unincorporated contractual arrangements, and corporate JVs which are jointly owned corporate vehicles holding the assets of the joint venture.

Determine the procedures for electing the management of the joint venture and decide what actions will require the consent of all partners.

Devise a dispute resolution mechanism such as mediation or arbitration in the event disagreements arise between partners.

Delineate the joint venture’s anticipated terms, such as causes for early termination and liquidation procedures.

Tips & Warnings

  • Due diligence and pre-contract investigations are important especially in joint ventures that involve substantial equity. The extent and focus of due diligence depends on the nature and type of contributions of the other parties. The investigation should concentrate on those areas that are critical to your business objectives such as technology, customer base, suppliers, brand names, distribution networks, personnel and regulatory licenses.

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