You’re the chief executive of a growing business. You’ve identified an opportunity that could take your organization to the next level, but your business lacks a key capability necessary to fully realize the opportunity. Perhaps you don’t have the right mix of talent in-house, the customer base to scale, a critical technology that’s difficult to license, or the physical infrastructure to expand operations. Leaders faced with this situation often look to the M&A market to fill the missing piece. If, however, there are no attractive targets available in the marketplace, establishing a joint venture with another organization can be a viable alternative.
Joint ventures (JVs) can appear to be a “can’t lose” corporate transaction. In the textbook scenario, JV partners have perfectly compatible businesses and each neatly fills a capability-gap of the other. While an archetypal JV can be formed, businesses contemplating a JV should be mindful of the challenges they present. Below are 5 key considerations to keep in mind when contemplating a JV.
1. Choose Your Partner Wisely: Nothing will impact the success of your JV more than selecting the right partner. Of course, business considerations will drive this process. You will need to conduct extensive legal, financial, and operations due diligence on potential partners. However, do not underestimate the importance of culture, reputation and individual personalities. The right partner will align not just with your business needs, but also with your firm’s core values.
2. Determine the Right Structure: JVs typically take one of two forms: (1) the JV parties form a new entity to carry out the JV or (2) the JV parties enter a contractual relationship for a particular purpose, such as an agreement to jointly development specific technology. The optimal JV structure will depend on the goals and interests of the partners, including the nature of the proposed business, the expected duration of the venture, liability protection considerations, the regulatory framework applicable to the new business, and whether the venture requires a separate management team.
3. Define Governance, Management and Decision-Making: JVs formed as separate entities will require their own governance and decision-making framework. For many new JV participants, this is the most challenging feature of JVs. The parties must devote time to answering key strategic questions. How will the JV be governed – by a board of directors or managers, or by the JV partners themselves? If by a board, who elects the board members? What fundamental decisions should be subject to a JV partner veto? Will one or both of the JV partners move employees to the JV, or will the JV hire outside executives to run day-to-day operations?
4. Fund the JV: The JV partners must determine how to capitalize the JV. This could take the form of an outright injection of capital, the contribution of IP and/or physical assets, and/or the assumption of debt. The partners will need to agree on the value of each partner’s contribution, as that will determine each partner’s ownership of the new business.
5. Plan an Exit Strategy: Many JV partners do not want to spend time at the outset of the new venture planning for its demise, but it is critical they do so. Each partner should identify their ideal exit scenario. Will it be an IPO of the JV? A sale of interests in the JV to a third party? A sale of their stake to the other JV partner? Each party should also understand their partner’s preferred exit, as that will inform whether the parties are compatible partners. JV participants must carefully consider the implications of an exit or total dissolution of the JV on the assets each contributed to the venture and the assets, technologies and properties developed during the life of the JV.
These are only some of the considerations businesses must keep in mind when contemplating a joint venture. They will also face complex tax questions, potential regulatory issues, and myriad legal issues that surface during the time-consuming formation process. The right legal counsel will be an invaluable asset at every stage of the process. While navigating the complexities of a JV can be daunting, the potential rewards can be significant. If you’re interested in exploring this opportunity and have questions specific to your situation, don’t hesitate to contact me, Matthew Muntean, or one of Manning Fulton’s corporate attorneys.
