Things to Consider Prior to Forming a Joint Venture

A joint venture can be a very profitable business move. In such an arrangement, two or more separate businesses form another entity under shared control. Most of the time the "parent" companies retain their own interests outside of the venture, but everything inside the venture is shared.

An alliance created with an eye on strategy, your joint venture partners should complement your business activities. They should capable of providing a complementary service like distribution, finance, technology or personnel. For example, you could form a venture with a company with distribution capabilities if you need one and offer your finance capabilities in return.

Joint ventures should be a win-win situation for all parties concerned. Everyone should benefit. However, a joint venture can go terribly wrong if the parties involved don't share the same vision for the company. It is therefore imperative that you cover all your bases before signing on the dotted line.

Do a background check

Before entering into any business relationship, it is important to know whom it is you are dealing with. This is especially in joint ventures, as your reputation becomes entwined with that of your partners in the venture. Verify information with third parties, and make sure that there is a strong basis for trust. Also, ensure that the company is capable of holding up its end of the deal.

Drawing up a business plan

Building the business plan should involve everyone in the venture. Start out with a list of intended parties to the venture, and establish its aims and goals. Establish definitions for success when the goals are met. And come up, by mutual consent, with the definitions and terms for an exit clause. and terms of the joint. And mutually agree on provisions for pre-mature dissolution. venture's dissolution.

Appropriate Structure

You can register a joint venture as a Limited Liability Company or as other business entities. A popular way that is gaining with rapidly expanding businesses is to form corporate partnerships. You can always look into what will work best for you.

Availability of Property and Resources

It is important to explicitly understand exactly what resources and property (appreciated or depreciated) are available from each member of the joint venture. Which resources will each company make available? Is there a specific use of one party's property? Proper understanding of availabilities will forestall a weakening of the economics of the deal later on down the road.

Special allocations

If you need to make special allocations such as special gain or loss, income and deductions, they should be identified in advance and provisions made. For example, in case of a loss situation, some of it will have to be divided amongst the partners. If a partner will be providing his expertise or any specific services, his compensation must be worked out beforehand.

If your partners and you find it difficult to reach agreement on the above issues, it may be time to say goodbye. You should look for other partners, with whom you can work. Because when you can come to an understanding, joint ventures can yield high profits.

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About the author: Vlad Ehrsam is the chief writer at Full Info on Business, there's a wealth of knowledge on the website, plus while you're there sign up for the free newsletter.
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