Joint ventures and partnering

How you set up a joint venture depends on what you are trying to achieve.

One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work.

Another option is to set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree how it should be managed.

You could also form a business partnership or a limited liability partnership, or even completely merge your two businesses.

To help you decide what form of joint venture is best for you, you should consider whether you want to be involved in managing it. You should also think about what might happen if the venture goes wrong and how much risk you are prepared to accept.

You may want to take legal advice to help identify your best option. The way you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong.

You need a clear legal agreement setting out how the joint venture will work and how any income will be shared.

Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects.

A joint venture can help your business grow faster, increase productivity and generate greater profits. A successful joint venture can offer:

• access to new markets and distribution networks
• increased capacity
• sharing of risks and costs with a partner
• access to greater resources, including specialised staff, technology and finance

Joint ventures often enable growth without having to borrow funds or look for outside investors. You may be able to use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.

A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

The risks of joint ventures

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

• the objectives of the venture are not totally clear and communicated to everyone involved
• the partners have different objectives for the joint venture
• there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
• different cultures and management styles result in poor integration and co-operation
• the partners don't provide sufficient leadership and support in the early stages

It's important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. You might decide that there are better ways to achieve your business aims.

You may also want to look at what other businesses are doing, particularly those that operate in similar markets. Seeing how they use joint ventures could help you choose the best approach for your business.

You can benefit from examining your own business. Be realistic about your strengths and weaknesses - consider performing a SWOT (strengths, weaknesses, opportunities and threats) analysis to discover whether the two businesses are a good fit.

You should take into account your employees' attitudes and bear in mind that people can feel threatened by a joint venture. It can also be difficult to build effective working relationships if your partner has a different way of doing things.

The ideal partner in a joint venture is one that has resources, skills and assets that complement your own.

A good starting place is to assess the suitability of existing customers and suppliers that you already have a long-term relationship with. You could also think about your competitors or other professional associates. You should consider:

• How well do they perform?
• What is their attitude to collaboration and do they share your level of commitment?
• Do you share the same business objectives?
• Can you trust them?
• Do their brand values complement yours?
• What kind of reputation do they have?

If you opt to assess a new potential partner, you need to carry out some basic checks:

• Are they financially secure?
• Do they have any credit problems?
• Do they already have joint venture partnerships with other businesses?
• What kind of management team do they have in place?
• How are they performing in terms of production, marketing and workforce?
• What do their customers and suppliers say about their trustworthiness and reputation?

Before you consider signing up to a joint venture, it's important to protect your own interests. This should include drawing up legal documents to protect your own trade secrets and finding out whether your potential partner holds intellectual property rights agreements. Also, it's worth checking to see whether they have other agreements in place, either with their employees or consultants.

When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevent any misunderstandings once the joint venture is up and running.

A written agreement should cover:

• the structure of the joint venture, eg whether it will be a separate business in its own right
• the objectives of the joint venture
• the financial contributions you will each make
• whether you will transfer any assets or employees to the joint venture
• ownership of intellectual property created by the joint venture
• management and control, eg respective responsibilities and processes to be followed
• how liabilities, profits and losses are shared
• how any disputes between the partners will be resolved
• an exit strategy

You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.

It is essential to get independent expert advice - contact your local Business Gateway as a starting point.

Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.

Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months' notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out.

The original agreement should also set out what will happen when the joint venture comes to an end. For example:

• how shared intellectual property will be unbundled
• how confidential information will continue to be protected
• who will be entitled to any future income arising from the joint venture's activities
• who will be responsible for any continuing liabilities, eg debts and guarantees given to customers

Even with a well-planned agreement, there are still likely to be issues to resolve. Good planning and a positive approach to negotiation will help you arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards.

For more information, read our guide on mergers and acquisitions.