Are There Risks with a Joint Venture?

Are There Risks with a Joint Venture - Business Formation Lawyers

Are there risks with a joint venture versus establishing a new corporate entity?  The Watkins Firm has guided our clients in these relationships for more than 40 years.  A joint venture is usually a temporary entity combining the interests of two or more separate companies with harmonious business interests.  It sounds good on the surface, but why do so many joint ventures fail?  Why do you need an experienced business attorney if you are considering a joint venture?

Any existing business should approach a joint venture opportunity with caution and due diligence.  However, there are many advantages to a joint venture and its usually a matter of risk, capital and potential reward.

In many cases one party may have a product or service and the other provides access to a geographical or vertical market.  The joint venture provides an opportunity for those with control over a product or service to take it to market without the expense or time of constructing their own sales and distribution capacity and market expertise.  The very nature of these relationships often hinges on a timely entry into a market.  The downside of time pressures is the constraints it may place upon due diligence and effective contract negotiation.  There are so many potential risks with a joint venture.  There are also some spectacular potential rewards.

Dan Watkins Founding Partner of the Watkins FirmPro-Tip: “You need to make sure your joint venture is focused upon well established objectives, clearly defined expectations regarding the contributions of each party, as well as an exit strategy for either success or failure.  There are substantial risks regarding the protection of intellectual property, existing distribution channel interruptions and conflicts as well as the potential for miscommunication or language and cultural issues.

A joint venture is the wild west! When you form a corporation, you have to comply with the corporation’s code, you form a LLC, you’ve got to comply with the Limited Liability Act.  When you form a joint venture, it’s between you, your lawyer, and the other party and their lawyers to draft it up any way you want, and be as creative as you want. And sometimes that’s the only way people want to get their feet wet on a real estate venture, a restaurant, a foreign market all kinds of things. You can write it up as a simple joint venture with an eye toward profitability and risk, almost a way of trying it before you make it a more formal relationship. Or, sometimes you have such good friends, relationships, or established trust, all you need is a joint venture and all the other stuff would just get in the way.” – Dan Watkins, Founding Partner

Joint ventures should lead to success for both parties.  The roles of each party to a joint venture should be clearly defined, and the mechanisms for tracking monetary revenue and the distribution or reinvestment of that income should be clearly defined in advance of going to market.  What resources will each contribute to the joint venture?  What form of corporate entity is needed to provide a foundation for success?

The joint venture also requires the disclosure and mutual exchange of valuable business information.  How can the business relationship be structured to ensure effective communications and access to critical business information related to the joint venture?  There are many risks with a joint venture and how can you protect your own interests?  Will each partner experience enough benefit to continue in the relationship?

The Watkins Firm has more than four decades of experience with the formation of joint ventures and representing clients as they consider a new venture with a business partner.  We provide sound counsel, and custom tailor corporate documents and bylaws as well as shareholder or operating agreements from our existing proprietary library of proven business contracts, that facilitate a transparent business experience for both parties.  We protect our client’s interest and ensure extensive due diligence is completed while working to facilitate the essence of the deal so that business may move forward.

What are the potential risks with a joint venture for your California business?  How can you use this business strategy to increase the sales and profitability of your company, while protecting your own intellectual property and minimizing risks and potential liabilities?  We invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.