17 Feb Five pitfalls most joint ventures face and how to avoid them – a tale of uncomfortable questions, gloomy scenarios and a business happy-ever-after
Most fast growing companies active in fast-paced, innovative environments have to find partners to develop and bring to fruition a new idea, technology or to simply experiment with new products. Joint-venture (JV) refers to a wide range of collaboration in which two or more businesses decide to share the management, costs and profits of a project.
Since in the Netherlands JVs are not strictly regulated, they can take the legal form of either a contract (for in-stance, between two Dutch “eenmanszaak”), a partnership without legal personality (from maatschap to VOF and CV) or a corporate joint-venture with legal personality (BV or NV).
Pooling resources together with one or more partners to turn a concept into existence seems like an efficient and success-prone strategy. Yet, according to world-wide statistics, a myriad of expert articles, studies on business ventures and country reports published by the major tax and business advisors, JVs are seen as problematic and continue to have high termination rates, ranging from 30 to 70 percent. Alongside its many advantages in terms of increased efficiencies and speed to market, this kind of partnership also presents high risks, because of its complex nature. A well set-up ven-ture aims to align not only the resources of two or more companies towards the commonly set goal but also to bring to a common denominator their business processes, commercial practices and management style.
Out of the many problems that can arise and negatively impact a joint venture, five are most common and have the direst consequences. Keeping an eye out for them ensures a highly collaborative, balanced and legally sound start of your collaboration. There is hardly such a thing as 50/50 partners. Many JVs are started by two companies and as such, simple math and a sense of fairness lead the starting entrepreneurs to a natural, al-most obvious idea of a 50/50 contribution to the capital of the JV and implicitly, to the same equal split of the profits and losses. In reality, partners bring a diverse set of skills to the table and have different approaches and degrees of motivation towards the daily activities of the JV.
It is therefore crucial to discuss in detail and document in writing what the exact contribution for each partner will be and how it can be fairly and consistently updated throughout the life of the JV. Keep in mind that over time the structure of your (long term) JV might change and put in place clauses to allow you to renegotiate the decisional and participation structure to reflect the new reality. Rules on reinvesting certain amounts of the profits or assigning them to new venues of business devel-opment should also be considered, as they will impact the amount of the distributed profits.
Decisions, oh, the decisions!
A multiple tier decisional process is mandatory for the smooth operation of any partnership. Many joint ven-tures run into problems because the partners are used to have control over their companies and want to be the ultimate decision maker. Therefore, it is useful to identify the decisions that can best benefit from the input and approval of all partners and to separate those from the daily operations. Additionally, in order to mitigate the risk of financially overcommitting the venture towards third parties under the pressure of a new deal or opportuni-ty, it is good practice to establish transactional financial thresholds above which the signature of all the partners are necessary.
A lack of sound financial management strategies
Running out of money can happen very fast on even the smallest projects, so attention must be paid to how the partners agree to procure financing. Loans from the partners made to the JV should bear the same favorable terms as offers from third parties and should be subject to approval by all partners to ensure transparency and legitimacy. Very importantly, the financial liabilities of the operations of the business an be mitigated by putting in place proper insurances and financial caps, especially in legal structures where the partners are personally lia-ble for the debts of the companies they run, such as the eenmanszaak and the VOF.
Poor communication and Service Level standards
A vital success factor of any venture is the good management of the relationships between partners and those between the JV and the world around it. Taking the time to ask the difficult questions, to put forward the gloomy “what if” scenarios from the very incipient stages of the venture ensures an open and prolific communi-cation strategy that must be carried out throughout the lifetime of the project. Periodical financial reports and status updates are great tools to ensure a solid and consistent degree of information and involvement of all the parties in the venture. By talking about the venture service levels should be, the partners gain insight on what the values of their companies are and how they can merge them into those of the venture.
No end in sight
All good things must come to an end. The saying may sound pessimistic, but it does apply to joint ventures. It is essential to provide for the situation when a partner wishes to exit the venture, or for when the objective of the venture is reached and all the assets and proceed-ings must be divided between the founders. A JV is by definition temporary and as such, it needs a well-struc-tured exit. Other must-have clauses to include in the venture agreement pertain to issues such as: how a new partner can be added to the venture, how IP assets can be divided or monetized, setting boundaries for the use of and access to sensitive information, especially when the venture brings together companies that are active in the same industry.
Despite the intricacy of the topic and the multi-layered consequences that an insufficiently planned-out joint venture can bring about, it still remains a viable and pro-ductive legal vehicle for creating innovative partnerships that facilitate access to new markets, increase company reach and develop amazing new products and services.
Fortunately, the thorniest problems of a JV can be addressed and prevented in the early negotiation stages, when it is easier to reach a deal that is balanced and fair for all parties concerned, since no conflicting interests or business setbacks have occurred. Contracts are said to be as strong or as weak as the thought that goes into them and the joint-venture agreement surely is no different.
Written by Georgiana Vasile
Senior Legal and Business Advisor and Owner of The Legal Folder www.thelegalfolder.com