Things You Should Consider Before Forming a Joint Venture

There are many benefits associated with forming a joint venture with another business, or even with other businesses. A joint venture arrangement allows the involved parties to create a new entity, often separate from the original businesses, which operates under shared control. This type of business alliance is usually strategic: combining the strengths of different companies. Technology, personnel, finance, and distribution are all capabilities that companies have to different degrees. A company with excellent financing may have trouble with distribution. By forming a joint venture with a business whose distribution network is wide, but whose financing capabilities do not allow it to reach its full potential, both companies can benefit from pooled resources.

But before you ally yourself to another company or two, there are some things that should be considered. Work out all ideas and compromises before the papers are signed, so that you know exactly what you are getting into. Here are the things that you must check into before forming a joint venture.

Check credentials. Most people understand the necessity of knowing the credentials of those they deal with. The same thing applies when forming a joint venture. Make sure that the reputation of the business (or businesses) you will be dealing with is as good or better than yours. You don’t want your reputation to sink under the weight of a disreputable business partner. You also want to do you research to make sure that the other company can hold up its end.

Develop a business plan. Each party involved in the venture should help make a business plan. A short list of possible partners should be made, as well as possible suppliers for things that are not available to the joint venture. Clearly defined goals, as well as an agreed upon definition of success should be developed as part of the plan. A mutually agreed-upon exit strategy is also necessary, terming the dissolution of the joint venture. This includes the procedure should an unexpected dissolution become necessary.

Agreeable and beneficial structure. Joint ventures have different structure options. It is a good idea to decide what kind of corporation your venture will take on, whether it be an LLC or some other type of organizations. Many companies with rapid growth form strategic corporate partnerships for their joint ventures. You need to research and discuss possible options, and then choose one that is mutually agreeable.

Property and resource availability. All parties should understand what is available from each company involved in the joint venture in terms of property and resources. Make sure all of these considerations are figured out prior to the signing of the papers. This can help you avoid the deal weakening economically down the road.

Special allocations. Gains or losses, as well as deductions and income, should be determined at the outset. Compensation to involved partners is also something that should be decided upon. Payment divisions for any special services or facility usages should also be determined at this time.

If substantial disagreements result over these arrangements, it may be necessary to find another partner. However, if you can work through the above issues, you are likely to have a successful joint venture.

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