I think the law of gravity also applies to Joint Ventures and partnerships in general. "What goes up must eventually come down". It is quite rare for today’s joint ventures and partnerships to survive forever. The needs of the parties change over time. Ownership structures change. Attitudes change. Market opportunities change.
Good planning and communication up front will help assure that your joint venture does not end in an “ugly” divorce. For all but the simplest of ventures, a written joint venture agreement is recommended. The purpose of this document is to provide clarification long after recollections and memories have faded. Some of the more important issues, but certainly not all of the issues, to cover in your joint venture agreements include:
Responsibilities of the partners – Be a specific as possible about the day to day responsibilities of the joint venture partners without being overly restrictive. If you answer who is obligated to do what and when then you have a pretty good start on this section of the agreement.
Authority of the partners – Be very specific about which partners can make decisions and who is authorized to obligate the joint venture entity or partners in any way. If you do not intend for a particular partner to be able to make large purchases, or enter into credit or debit arrangements then specifiy that in the agreement.
Performance expectations – The better you can break down the results and actions you expect from the partners the better positioned the partners are to address good or poor performance issues. Activities related to sales, marketing, product creation, customer support, etc. should be broken down into measurable performance measures that can be routinely tracked and reported.
Profit or revenue sharing – Specify how profits and/or revenues will be split among the partners. If the split is not fixed then specify the formula and criteria that will be used to split profits and/or revenues. The goal is to eliminate all surprises related to money.
Future capital infusion – Sometimes an additional investment of cash or other resources is required to sustain or grow the joint venture business. Specify who, how and when the joint venture partners will be obligated to make additional contributions to the joint venture beyond the initial obligation. Closely tied to this provision is to address what happen if one of the obligated partners chooses not to fulfill their obligation. This happens far more often than anyone would like.
Ownership and intellectual property issues – Specify which partners own the separately and jointly created assets of the partnership in the event of a dissolution of the joint venture, and even while the joint venture is operation. For example: who owns physical assets brought into the partnership; who owns physical assets created by the joint venture entity; who owns the customer list; who owns trademarks, patents and similar intellectual property rights; who has the right to sell or market products created by the joint venture after dissolution; who can market independently to joint venture customers while the joint venture is still active; etc, etc, etc.
Amicable “divorce” provisions – Specify how and when the joint venture will be dissolved. This is a more difficult section of the agreement that you might think, and often it is not given the level of thought required to avoid conflict at the time of a split up. Specify what happens in following scenarios: one partner wants to move on to other ventures (most common reason); one of the partners fails to fulfill its obligations; one of the partners violates one of the provisions of the agreement or acts illegally or unethically; the joint venture or one or more of its partners become insolvent; one of the partners dies or becomes incompetent; one of the partners is unable to perform for whatever reason; etc, etc, etc.
Summary – Even the simplest joint venture arrangements can grow into significant, long-term businesses. Any effort and thought invested in the beginning to work out the details and expectations of the partners and commit those to a written agreement will pay off many times over when and if the joint venture should later turn sour or outlive its usefulness.
You rarely know up front exactly where a joint venture will ultimately go. I have been a joint venture partner in ventures that have spanned several decades and produced hundreds of millions of dollars in revenues, while others that should have been long-lasting have ended prematurely. In every case, the efforts spent on the front end on the joint venture agreements have been time well spent…. and probably insufficient to cover all the bases that should have been covered. Spend the time up front…. save the headaches later.