Introduction
 
A joint venture involves two or more businesses pooling their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared.

The reasons behind forming a joint venture include business expansion, development of new products or moving into new markets, particularly overseas.

Your business may have strong potential for growth, and you may have innovative ideas and products. However, a joint venture could give you:

• more resources
• greater capacity
• increased technical expertise
• access to established markets and distribution channels

Entering into a joint venture is a major decision. This guide provides an overview of the main ways in which you can set up a joint venture, the advantages and disadvantages of doing so, how to assess if you are ready to commit, what to look for in a joint venture partner and how to make it work.

Types of joint venture

How you set up a joint venture depends on what you are trying to achieve.

One option is to agree to co-operate in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners could agree a contract setting out the terms and conditions of how this will work.

Alternatively, you might want to set up a separate joint venture business, possibly a new company to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company, and agree how it should be managed.

In some circumstances, other options may work better than a limited company. For example, you could form a business partnership or a limited liability partnership. You might even decide to completely merge your two businesses.

To help you decide what form of joint venture is best for you, you should consider whether you want to be involved in managing it. You should also think about what might happen if the venture goes wrong, and how much risk you are prepared to accept.

It's worth taking legal advice on the best option. The way you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong. You need a clear legal agreement setting out how the joint venture will work and how any income will be shared.

Joint venture - benefits and risks

Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects.

A successful joint venture can offer:

• access to new markets and distribution networks
• increased capacity
• sharing of risks with a partner
• access to greater resources, including specialised staff and technology

A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

Joint ventures are especially popular with businesses in the transport and travel industries that operate in different countries.

The risks of joint ventures
Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

• the objectives of the venture are not 100 per cent clear and communicated to everyone involved
• the partners have different objectives for the joint venture
• there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
  different cultures and management styles result in poor integration and co-operation
• the partners don't provide sufficient leadership and support in the early stages

Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.

Assess your readiness for a joint venture

Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy.

It's important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. In fact, you might decide that there are better ways to achieve your business aims.

You may also want to look at what other businesses are doing, particular those that operate in similar markets to yours. Seeing how they use joint ventures could help you choose the best approach for your business. At the same time, you could try to identify the skills they use to partner successfully.

You can benefit from examining your own business. Be realistic about your strengths and weaknesses - consider performing a SWOT (strengths, weaknesses, opportunities and threats) analysis to discover whether the two businesses are a good fit. You will almost certainly want to find a joint venture partner that complements your own strengths and weaknesses.

If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and make more profit. Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.

Plan your joint venture relationship

Before starting a joint venture, you need to understand what you each want from the relationship.

Smaller businesses often want to access a larger partner's resources such as a strong distribution network, specialist employees, and financial resources. The larger business might benefit from working with a more flexible, innovative partner or simply from access to new products or intellectual property.

Similarly, you might decide to build a stronger relationship with a supplier. You might benefit from their knowledge of new technologies, and get a better quality of service. The supplier's aim might be to strengthen their business from guaranteed volume sales to you.

Whatever your aims, the arrangement needs to be fair to both of you. Any deal should:

• recognise what you each contribute
• ensure that you both understand what the agreement is expected to achieve
• set realistic expectations and allow success to be measured

The objectives you agree should be turned into a working relationship that encourages teamwork and trust.

Choosing the right joint venture partner

The ideal partner in a joint venture is one that has resources, skills and assets that complement your own.

Customers and suppliers with whom you already have a long-standing relationship are a natural place to start your search. Other options for a partner include your competitors or other professional associates.

As well as examining their performance, you need to assess potential partners' attitude to collaboration, and whether you can trust them. Failing to do this could damage a valuable relationship.

A partnering relationship stretches beyond an ordinary contractual relationship. The way your partner behaves, and their reputation, could affect you. You should consider whether their brand and attitudes suit you.

For example, if you believe in excellent customer service, you might have problems working with another business that focuses on cost-cutting. Their approach could make it difficult for you to maintain your high levels of customer relationship management.

Make sure that you share the same business objectives, and that the deal is fair to both of you. A joint venture partner will not put much effort into making the joint venture a success unless they feel they are getting the most out of it.

If you don't already know the people you'll be working with, you should carry out basic checks. Look into your potential partner's management structure - what kind of management team do they have, and can you work with them. Find out about their production, marketing and personnel. A good partner should have a first-class workforce and facilities, and be financially secure. In addition to checking their financial and credit information, find out whether they already form joint ventures with other businesses. Try to get referrals from their customers and suppliers in order to find out about their trustworthiness and reputation.

You should also obtain signed copies of any confidentiality and non-competitive agreements as well as operating contracts before entering into a joint venture. Make sure you draw up legal documents to protect your trade secrets. Proprietary rights should also be checked - does your potential partner have intellectual property rights agreements or agreements with employees and consultants?

You should also bear in mind that your relationship will need to evolve as market conditions change. A joint venture is more likely to succeed if you build a strong relationship.

Create a joint venture agreement

When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevent any misunderstandings once the joint venture is up and running.

A written agreement should cover:

• the structure of the joint venture, eg whether it will be a separate business in its own right
•  the objectives of the joint venture
• financial contributions you will each make
• whether you will transfer any assets or employees to the joint venture
• ownership of intellectual property created by the joint venture
• management and control, eg respective responsibilities and processes to be followed
• how liabilities, profits and losses are shared
• how any disputes between the partners will be resolved
• how the joint venture can be brought to an end and what will happen

You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.

Make your joint venture relationship work

A clear agreement is an essential part of building a good relationship. Consider these ideas:

• Get your relationship off to a good start. For example, you might include a project that you know will be a success so that the team working on the joint venture can start well, even if you could have completed it on your own.
• Communication is a key part of building the relationship. It's usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture.
• Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work.
• It's essential that everyone knows what you are trying to achieve and works towards the same goals. Establishing clear performance indicators lets you measure performance and can give you early warning of potential problems.
• At the same time, you should aim for a flexible relationship. Regularly review how you could improve the way things work and whether you should change your objectives.
• Even in the best relationship, you'll almost certainly have problems from time to time. Approach any disagreement positively, looking for "win-win" solutions rather than trying to score points off each other. If you can't reach agreement yourselves, your original joint venture agreement should set out agreed dispute resolution procedures.

Ending a joint venture

Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.

Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months' notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out. The original agreement might require your partner to either sell you their share or buy you out, or vice versa.

The original agreement should also set out what will happen when the joint venture comes to an end. For example:

• how shared intellectual property will be unbundled
• how confidential information will continue to be protected
• who will be entitled to any future income arising from the joint venture's activities
• who will be responsible for any continuing liabilities, eg debts and guarantees given to customers

Even with a well-planned agreement, there are still likely to be issues to resolve. For example, you might need to agree who will continue to deal with a particular customer. Good planning and a positive approach to negotiation will help you arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards. It can also raise your profile in the business community as a reliable and productive partner.