JOINT VENTURE AGREEMENT
By Rahul Singh December 28, 2017
When two or more parties, whether individuals or entities, enter into an agreement to join their forces to gain a tactical and strategic edge in the market., it is referred to as a “joint venture.” The organization of a joint venture serves as a short term partnership for the duration of the project, in which each participant shares responsibility for the project’s associated costs, profits, and losses. Although the parties share responsibility, the joint venture is its own legal entity that remains separate from the parties’ other business interests.
BENIFITS OF A JOINT VENTURE
1 – New insights and expertise: Starting a joint venture provides the opportunity to gain new insights and expertise. After forming the short-term partnership the market becomes way more easy to understand for both the companies.
2 – Better resources: Forming a joint venture gives access to better resources, such as specialized staff and technology. All the equipment and capital that the companies needed for their project can now be used.
3 –Temporary: A joint venture is only a temporary arrangement between two or more companies. By definition, they don’t commit to it for a long term.
4 – Both parties share the risks and costs: In case the joint-group project fails, no single party bears the costs of its failure. Because both the parties had volunteered to share the expenses, hence both will also support the losses.
5 – Joint ventures can be flexible: Joint venture can have a limited lifespan and can only cover only a fraction of what the companies do, thereby limiting their commitment as well as their business’s exposure.
6 – There are ways to exit a joint venture: In the timeline of divestiture and consolidation, a joint venture offers a creative way for companies to escape non-core businesses.
7 – Companies know what's theirs and they are able to sell it: Gradually, firms can separate their business from the rest of the organization, and then later, sell it to the other parent company. Approximately 80% of all joint ventures end in a sale, from one partner to the other.
8 – Parties are more likely to succeed: Companies chances of success will become higher as they are already riding with a renowned brand. As a result of this, their credibility will also vastly improve.
9 – Parties will build relationships and networks: Even though their partnership is only for a specific goal, this move will enable the parties to create long-lasting business relationships.
10 – Companies potential will virtually be limitless: Despite having little to no money at their disposal, companies can create more venture deals in the process. They will create momentum and have partners with them.
11 – Companies get to save money by sharing advertising and marketing costs: This works for a lot of other types of costs. Starting a joint venture is a great way to save money and/or split costs.
12- International joint venture eradicates the risk of discrimination: International joint ventures are very common nowadays. This is a great opportunity to cooperate with people from different countries and combine their strengths.
ESSENTIALS OF A JOINT VENTURE AGREEMENT
A joint venture begins when the parties enter into a contract or “joint venture agreement,” the specifics of which are of crucial importance for avoiding problems later on. In creating the agreement, the parties should state specifically the purpose and goal of the venture, as well as the venture’s limitations. The agreement should be very specific in outlining each party’s duties and rights under the agreement, taking into account that all parties are entitled to share in the profits as well as the losses incurred in the venture.
Each party to a Joint Venture has a responsibility to act in “good faith” in all matters regarding the venture, taking care to uphold the interests of all parties involved. This amounts to a legal fiduciary duty to the venture, even if it becomes necessary for a party to place individual interests below those of the group.
The joint venture agreement should specify both the formation and termination dates, or that the venture terminates when its purpose has been accomplished. Some Joint Venture agreements specify that the venture will automatically terminate if one of the members dies.
More specifically, a Joint Venture agreement should specifically detail the following:
- Structure – whether the Joint Venture will be a separate business entity in its own right, or simply a short term project
- Objective – the purpose and goals of the Joint Venture.
- Confidentiality – an agreement for the parties to protect any trade and commercial secrets disclosed during the venture
- Financial Contributions – how much money each party will contribute to the venture
- Assets and Employees – whether each party will contribute assets, and whether they will assign employees to, or hire new employees for the venture
- Intellectual Property Ownership – which party will have ownership of any intellectual property created by the venture
- Management – specific responsibilities of each party, and the procedures to be followed in operations of the venture
- Profits, Losses, and Liabilities – specifics of how any profits and losses are to be distributed or shared among the parties, as well as the assignment of liabilities
- Disputes – specific instructions for the resolution of disputes that may arise between the parties
- Exit Strategy – specific details on when and how the Joint Venture will end, including the final distribution of assets and debts.