by Marie Huntley
Last time, we wrote about the four main structures you can use when setting up a Joint Venture (JV). One of the most popular is a contractual JV agreement. Remember, this is when you don't set up a new company; rather, you and your business partner agree how you will work together as two separate companies.
Most commercial matters might seem patently obvious, but it's important that everything is articulated nicely, neatly and clearly. Here are some of the issues to cover at the outset of your JV agreement:
- Scope
- What work you will do together? How long for?
- What work you will do together? How long for?
- Practicalities
- Tasks and responsibilities: Who is doing what?
- Tasks and responsibilities: Who is doing what?
- Financials
- There will inevitably be shared costs. Who is paying for what? Who will be buying the new equipment and materials you need? Will you be charging each other for internal time? Who is liable for expenses and debts?
- There will inevitably be shared costs. Who is paying for what? Who will be buying the new equipment and materials you need? Will you be charging each other for internal time? Who is liable for expenses and debts?
- Funding
- What percentage of funding will each of you provide? Is there a maximum? What are the time limits or triggers for delivering each round of funding?
- What percentage of funding will each of you provide? Is there a maximum? What are the time limits or triggers for delivering each round of funding?
- Income
- Hopefully, income will be created by the JV! You have to be utterly clear about which element each party receives income from, and the mechanics of payment.
For example, if one partner is selling a service direct to the client supported by the other partner, the first partner might receive all the income from the client and the second partner might have to invoice the first for their share of the work. In this case, the partners would have to agree how the money is allocated between them.
Alternatively, each partner might be contributing very different elements to the work. Let's say the JV is developing a house, where one partner is the architect and the other the builder. They might agree terms on working together, but then each partner would invoice the client separately.
- Hopefully, income will be created by the JV! You have to be utterly clear about which element each party receives income from, and the mechanics of payment.
- Assets
- It's not wise to buy assets jointly. You should either own assets separately or with distinct shares. Ensure that real life is consistent with the agreement.
- It's not wise to buy assets jointly. You should either own assets separately or with distinct shares. Ensure that real life is consistent with the agreement.
- Intellectual property
- Branding and marketing is a really big issue. How will the JV and its activities be promoted? Will you both use separate branding but present your JV to clients as a combined business entity? Or will you set up a different brand just for the JV, which is not based on either of your existing brands? In that case, you'll also have to make decisions about who owns the new brand, whether one partner licences it to the other, and who will own the brand at the end of the joint venture.
Exclusivity
Agree whether you are planning your JV business on an exclusive basis, and if so, how long for.
To use a dating analogy, you need to know whether either of you is allowed to chat up someone else at the same time. If you don't clarify this point, you might spend time, money and energy pursuing JV negotiations only to find that your proposed business partner has gone off with someone else.
Confidentiality
During the JV negotiations, both parties are likely to share information about their businesses that would normally be considered confidential.
For that reason, we highly recommend setting up a Confidentiality Agreement once you've agreed in principle that you'll move forward together, but before you share your innermost secrets.
Independence
If the purpose of the JV is to tender for business opportunities together, you might want to pre-agree whether each of you can pursue the opportunity independently if it doesn't work out under the JV.
If you've shared too much, you might feel the other party has an advantage when pitching for the business. Having a confidentiality agreement in place will protect you from this scenario. You have to agree these things before you go too far.
For example, Mary and Joseph (not their real names) decide to team up and pitch a project to Hammersmith Council in six months' time. However, after five months, JV negotiations break down, and they agree not to work together after all.
Are they each free to go after the client on their own? Or to pitch for the business with someone else? Or should they both back off?
If the Council had originally been Mary's client, and it was her who found out about the opportunity and introduced it to Joseph, can Mary go after it but not him? Would Mary mind if Joseph became her competitor?
Partnership
As stated in our other article on this subject, we think you should avoid your JV becoming an old-fashioned unlimited partnership. For that reason, your agreement should explicitly state that this working relationship is not a partnership, and that you are not jointly and severally liable for anything.
Conclusion
As with all working arrangements, it is wise to discuss all these 'housekeeping' precautions before you delve too deeply into the negotiations, and draw up a formal agreement in writing in advance. Of course, we can help with that.
