Every business searches for avenues to increase its profitability and expand into new or different markets. Such expansion can be risky and expensive, however, under proper circumstances, companies can partner together, sharing the costs and risks, through joint ventures. Companies should consider the following when structuring a joint venture.
• Joint Venture Entity. Consider using a joint venture entity such as a limited liability company, which is jointly owned by the joint venture partners. This separates the liabilities of the joint venture business from the businesses of the partners, and a proper Operating Agreement will govern the management and operation of the venture and define the rights and obligations of the parties.
• Performance Milestones. Consider including performance milestones, which if not satisfied, provide the other party with the right to terminate the agreement or buy out the other partner, or which result in an adjustment of the distributions and profit and loss allocations to which each party is entitled.
• Dispute Resolution. There should be a simple and clear procedure for resolving disputes (especially if control is equal), so that a deadlock on key decisions does not stifle the operation of the business. Parties can agree up front, on a neutral third party, to resolve any disagreements in the best interests of the joint venture. In addition to a speedy resolution, this can often eliminate the distrust and animosity that may result from litigation. In the alternative, expedited arbitration proceedings should be mandated.
• Termination and Unwinding. Include clear guidelines and procedures to unwind the joint venture. If there is a buyout right, clearly define the triggering events and the valuation methodologies.
• Non-Competition. Determine whether to include non-competition restrictions during and/or for some period of time after the termination of the joint venture. Noncompetition provisions could apply based on customer or geographic boundaries or business lines. For example, if one party has a pre-existing customer relationship prior to entering the joint venture, will the other party be precluded from working with that customer after the termination of the venture? If two parties that have preexisting operations in different geographic territories form a joint venture, will each party be prohibited from operating in the other party’s territory after the termination of the joint venture?
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.