To JV or not to JV?
Numerous questions need to be asked and answered when deciding whether or not to set up a joint venture.
- What is your client getting out of the JV?
- What is your client giving up?
- How does the JV position my client for the future?
- Are the terms of the JV fair?
- Will the IP be sufficiently protected?
- Do you trust your proposed joint venturer?
- Will you need to set up a new entity?
- What will the ownership look like?
- Who will have control?
- How will profits/expenses be split?
- Duration?
There are other questions, but these should suffice to get your mind focused on the importance of seeing the full picture before jumping in.
It is also important to remember that businesses are generally interested in their own success. What is in it for the other side? Do your goals align?
Advantages
When you work with someone new, you have the opportunity to gain new insights and learn from someone else’s expertise. Maybe your client has a big idea and this is a good way to get funding for that idea.
Because this is a temporary arrangement, your client has the ability to get in, benefit, then get out. Also, JVs are often just addressing a portion of your client’s business, not the entire thing, which can allow for focus on that one portion while not neglecting the rest.
Since there are other companies involved, hopefully everyone is bearing the risks so that your client is not alone in that. This includes sharing all kinds of costs like research and development, marketing, etc.
If the other company your client will be working with is larger and more well-known, this JV can be a way to piggyback on that company’s reputation and success. It also helps with relationship building and expanding the network.
Disadvantages
It is nearly impossible to have equal involvement in a JV. If your client is doing more than its fair share, that should be reflected in the profit percentage. Negotiating this can cause strain. Additionally, if your client is going to be doing more, is it so much that it causes neglect for the rest of the business?
People have different ways of doing things. This is the same with businesses. It is a good idea to discuss or observe the culture of a business that your client wants to do a JV with to ensure they can all work together well.
JVs are a lot of work to put together and operate. Both sides need to be vested and willing to do the work. If your client does not have a pre-existing relationship with the co-venturer, then they may misjudge work ethic, reliability, and interest in the JV overall by the other party. This goes back to the thought that the client needs to know what they are getting into.