There are many reasons why you might consider partnering with another business or nonprofit. Often, working with another business that is not a direct competitor can provide your business with some expertise that it doesn’t already have or that you may not have the resources to develop in-house. This can lead to the formation of new products, services, or even market areas that neither business could develop on its own. But if you’ve ever had to work with individual business partners or nonprofit board members with diverging interests, then you can probably imagine how much more complex it is to successfully form these relationships with another entity.
What should you be considering when discussing these types of arrangements?
What is a joint venture?
A joint venture is an umbrella term covering the wide variety of situations where two or more business entities agree to work together on a specific project. The parties aren’t merging their respective organizations, but they are partnering together in some way. You might also see a joint venture referred to as a partnership or strategic alliance.
Like any business relationship, the joint venture agreement should be documented in writing. When you become a party to a joint venture, you are likely going to share significant resources that you wouldn’t normally share with other business or nonprofit. For example, you might be using each other’s trademarks to market the new product or service. Your staff will be working closely with theirs and potentially sharing confidential information. And of course, each party will probably have expenses to contribute to the project and will be expecting a share of the profits from the project. Any of these areas can lead to misunderstandings that can jeopardize the business relationship and harm your business or nonprofit (both financially and reputationally).
Joint Venture Checklist: What to Discuss Before Drafting the Agreement
Here are some of the important items to discuss with the other parties involved before we even begin drafting the joint venture agreement:
1. Parties: This may seem obvious, but too many small businesses and nonprofits name the individuals involved in the project as a party to the agreement rather than the relevant business entity. Naming yourself individually defeats the purpose of having the limited liability protections that come with forming a business entity in the first place! You should also double check that the business name of the other party is actually a registered business that is authorized to do business.
2. Describe the Project: What is the goal? How long will the relationship last? Are there any limits to the scope of the project?
3. Roles: What will be each party’s role in the project? What does each party need to do in order to accomplish the goals of the joint venture?
4. Contributions: What is each party expected to contribute to the joint venture? Remember, contributions might be funding, but contributions can also be services, know-how, property (including intellectual property), etc. Will contributions (especially funding) be ongoing? Investing in a joint venture, like any business investment, may require the parties to invest more than they had originally planned. What happens if the joint venture needs an influx of cash? Or more time from your staff?
5. Intellectual Property: Will the joint venture be creating any new intellectual property? If new content, trademarks (including names, logos and/or slogans), or products/developments will be created, then who will own this IP? What if any information is being exchanged that should be kept confidential? What rules will govern how the party will use this IP? It is especially important to establish rules governing how your branding might be used in the context of the joint venture.
6. Management: How will the joint venture be managed? How will decisions be made? How will deadlocks be resolved?
7. Accounting and Profits: How will profits be calculated? When will profits be distributed? What, if anything, must happen before profits are distributed? Who will keep the records related to the joint venture? What records should be kept? Who will handle the accounting? While having these discussions, we can also work with your accountant to address any tax implications.
8. Dispute Resolution: What happens if things go wrong? For example, what if a party fails to provide its contributions by the deadline? What if the joint venture isn’t profitable? What if there are any liabilities or claims related to the joint venture? In considering everything that could go wrong, this is typically where we recommend provisions related to indemnification, insurance requirements, and whether to require mediation and/or arbitration.
9. Termination: What will happen when the joint venture is concluded? What if a party wants to withdraw from the joint venture early?
If your business or nonprofit are considering a joint venture relationship, our business attorneys can help you negotiate the terms and draft an appropriate joint venture agreement that protects your organization’s best interests.