Your company is on the path to greatness, but how can you get there sooner, rather than later? Organic growth will take too long. Raising money to accelerate growth is hard and costly in terms of diluted ownership and loss of control. You don’t have the money to grow by acquisition.
Eureka! You decide to partner with another business that already has the technology, manufacturing expertise, customer base or whatever it is that you lack to make your business the next giant of industry.
The generic term for this is a joint venture. The concept can apply to an almost infinite variety of arrangements—from informal business relationships to complex legal structures where the business partners form a separate company with hundreds of pages of documents governing everything from operations and technology development to financing and dispute resolution. While the details will be different for each deal, certain key considerations always need to be addressed:
Control and Authority.
Control can be an important issue between the business partners. In a co-development arrangement to create new technology applications, for example, how will decisions be made about which applications to pursue? Control can also be important with respect to third parties. In a “channel partner” arrangement, for instance, one party has the product or service and the other has the customer contacts to introduce the product or service into a new industry market. The party with the product or service needs to ensure that its partner cannot make commitments to customers regarding pricing, product specifications, etc. that will bind the product or service provider without its consent.
What type of investment is required?
As with any business undertaking, you need to consider what type of investment in time, money or personnel will be required to make the arrangement work. The greater the investment required, the more important the other issues become. If you enter into a channel partner arrangement for a new but small market that you want to enter and you will just be providing your standard products to a new set of customers, you don’t have much at risk if the arrangement does not work out. If you enter into a technology co-development arrangement and failure could mean loss of millions of dollars, several years of work by key personnel and disputes over ownership of some key technology, you had better do your homework before the arrangement gets started.
How do we break up?
You always have to consider the possibility of failure and the consequences. Because joint ventures tend to involve more significant entanglements between business partners, it is important for the parties to agree in advance on how to dissolve the relationship if it does not work out. You will not be able to foresee and address every possible failure situation, but prior agreement on at least some key terms increases the likelihood that the parties can disengage amicably and quickly if necessary.
Make sure that two-plus-two really equals 10 and that you have a good business partner.
Lawyers can draft voluminous documents for joint ventures covering every conceivable issue in excruciating detail, but the success of a joint venture is usually determined by (a) whether the proposed business arrangement really is win-win for both parties and (b) whether you have a good business partner to work with. If the business deal primarily benefits one side, it will probably fail sooner or later. If your business partner is unscrupulous, unfair, unreasonable, etc., then you are likely to have a bad experience regardless of how good the legal documents are or how good the business deal should be for both parties.
