Joint Ventures are a business initiative that promotes, expands, creates opportunities for businesses over a short-term period with minimal structures and processes.
Post COVID, many Businesses are currently operating in recovery mode to try and meet customer demands, meet operational costs, create cashflow projects and earn revenue for the shareholders. The traditional methods of growth do not currently favor the economic situation and thereby it is imperative to become creative, while remaining afloat.
A joint venture can be defined as a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge and profits. Though they share attributes with partnerships, joint ventures are different in the sense that they are created for a limited and specific project or undertaking over a definite period of time while partnerships may endure longer. For a joint venture to materialize there has to be identification of likeminded partners where by each partner would have to outline their expectations and objectives, these are then put in writing. The agreement should among other aspects, enlist the contribution of each of the parties, how the profit would be shared, what technical expertise each of the partners is bringing to the table, and how the partnership would be terminated.
Benefits Of Joint Ventures To SMEs
1. It enables parties to gain competitive and business advantage by re-grouping with another entity for bidding purposes, where one company does not have all the expertise required;
2. It enhances management of resources in a cost-effective manner without having to incur high financial costs for operations, since they can be cost shared between two entities;
3. Joint Ventures help businesses tap into new markets that would have been impossible to enter in the short term, without partnering with other business partners.
4. Joint Ventures provide easier ways of attaining technical support and knowledge on complex projects by joining hands with another partner;
5. It is an income generating tool that can increase revenue by partnering with other partners;
6. They also create market confidence and expansion and gain hands-on technical experience for new ventures.
What You Must Do Before You Enter Into A Joint Venture
Prior to entering into a Joint Venture with another partner, it is important to ensure that one conducts in-depth research to understand the Partner that they wish to enter into business with. The following are key aspects to consider;
a. Is the prospective Partner a legally registered entity and do they have capacity to enter into this arrangement;
b. Who are the Directors and the shareholders; In the event that the company has different shareholders, one should check whether there are shareholder agreements and whether they would object to this venture.
c. Check the Governance requirements at a leadership level and which authorizations would be required to approve the Joint Venture
d. Is the prospective Partner financially capable of entering into a partnership with you. You may have to consider a review of their audited financial statements over the last two/three years to gauge financial capacity and their level of indebtedness.
e. It may also be important to confirm that the prospective partner does not have any material litigation that may disrupt the Joint Venture.
f. Check whether the staff is compliant with the labor laws, Tax & accounting treatment and other key regulatory requirements.
g. Check whether the management team has the right expertise that you are looking for, such that you are able to get the right fit for your venture/project.
h. Understanding operational requirements and standards that may be considered in the course of the Investment/Business Venture.
i. Review key governance policies that may affect the operations of the Joint Venture, for example, where the structure of a company is that it has a Holding Company, whether it would require approval of the Holding Company, the policies on Dividend Payments, Transfer pricing if the Joint Venture is with a company in another company, Human Resources Policies and Delegation of Authority.
Key Considerations In A Joint Venture Agreement
a. Ensure that rights and obligations of each party under the Joint Venture are clarified and enlisted in the agreement. Where these are not clear, there would be immense business disruptions including among other things, failure to meet operational costs, litigation exposure, reputational risks for both parties as a result of failure to meet the obligations of the Joint Venture.
b. Parties should agree on how the profit would be shared between the Partners and how the same would be paid.
c. Clarity on the different dispute resolution mechanisms that should be engaged in the event of any disagreement between the partners.
d. The different resources provided by each partner should be clearly spelt out.
e. Whether any Intellectual Property Rights may arise as a result of the Joint Venture and to whom they would belong.
f. The Human Resource that would be required for the Joint Venture and the type of technical expertise.
As explained above, Joint Ventures give businesses the potential to raise revenues over a shorter period of time. However, it is important to do it right. The foundation of a successful Joint Venture is based on a strong legal foundation, without which, the business would result into financial loss and other related risks.
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