Nothing Ventured Nothing Gained?
Companies operating in Northern Ireland’s manufacturing sector have long used joint ventures as a way of seeking new opportunities and to grow their businesses. Put simply, a joint venture is a means of combining the expertise and resources of two separate companies into one common enterprise. It can be a very attractive option for businesses who wish to grow faster and generate greater profits. A joint venture can lead to a greater distribution of products, without the need to borrow funds or look for external investors. A company in the manufacturing sector might pursue a joint venture to expand their reach into a new region, or to consolidate and strengthen their position in Northern Ireland.
However, if the parties do not take the appropriate time and advice at the outset to deal with certain issues that can arise, then they are not giving the joint venture the best possible chance of success. Difficulties with the management, control and structure of joint ventures can lead quickly to joint venture failure. In the excitement of setting up a joint venture it can be easy to overlook the gravity of the (almost inevitable) cultural differences between the parties. It is essential at the outset that these differences are anticipated and agreement around how to deal with them are captured in a joint venture agreement.
Joint ventures can take several forms, the most common being a partnership, a company, an LLP and a main contractor / subcontractor relationship. In the absence of a precise, particular plan, the nature of the relationship between the parties during the lifetime of the joint venture can be difficult to discern and can lead to problems if the parties do not clearly understand their respective rights, obligations and liabilities.
Without close attention to the structure of the joint venture at the outset, parties can find themselves in a relationship that is much closer than intended, which can be detrimental to its success in the long term. It is important that the parties consider carefully which structure will suit their particular joint venture best and take advice as to how that structure is realised.
A joint venture must be managed with specific attention paid to the often differing interests and contributions of its participants. Management of a joint venture must reflect the degree of control each participant will have and how the joint venture business is managed: will there be one controlling participant or a collective management between the parties?; will there be key decisions that require the approval of both parties?; will there be a management board reporting to the joint venture partners? These are all essential questions which must be clarified at the outset and then be captured in the JV agreement.
What happens if you fall out?
As noted it is important that the parties agree appropriate management arrangements but what happens if the parties don’t agree? This must be anticipated and particular dispute resolution arrangements should be included to help break a deadlock.
Parties should consider an escalation procedure which can help to nip issues in the bud early. If this fails, there is always the option of third party mediation. If the problem persists, it it serious enough to trigger a mandatory buy-out procedure? Do you want to be in a position of having to finance a buy-out? If the dispute brings the joint venture to an end, how should the break-up be managed? These are questions that should be thought about and answered at the outset when the parties can deal with them with the benefit of the positive spirit in which they are approaching the joint venture. They are much more difficult to address at a later date if something has gone wrong and the relationship of the parties is being tested.
If the joint venture has run its course (and hopefully achieved some of its goals) then bringing it to an end doesn’t need to be difficult. Profits can be split, the business sold and assets returned. Breaking up can be hard to do…but it can also be amicable. The reality is that most joint ventures will have a certain shelf life. It is important to consider what that shelf life is and what happens at the end of it – again the key is to be clear about these issues at the outset and capture the parties’ intentions in the joint venture agreement.
If you are considering joining forces with another company by way of a joint venture and would like expert advice, please speak to Chris Guy, Director, Mills Selig: www.millsselig.com