Joint Ventures and human relationships

If you are a business owner who wants to significantly increase market reach, break down barriers to entry in your market, or generate higher revenues in a short amount of time, you may consider forming a joint venture.

If you are a business owner who wants to significantly increase market reach, break down barriers to entry in your market, or generate higher revenues in a short amount of time, you may consider forming a joint venture.

A joint venture does not have a strict legal definition, but usually refers to  a strategic alliance where two or more parties, usually businesses, agree to partner in order to share markets, expertise, risk, expenses, intellectual property, assets, and, of course, profits.

Joint ventures are particularly common in Rwanda when foreign companies are entering into the Rwandan market and they partner with local companies which are familiar with the market.

In Rwanda most joint ventures are formed in the followings, firstly, by way of a joint venture agreement: the business entities involved retain their independent identity but enter into an agreement to partner with each other to perform specific projects or tasks so as to make the most of their collective strengths while minimizing their weaknesses.

Secondly, a joint venture may be formed by the businesses involved forming a new company in which they are joint owners (shareholders).

A joint venture differs from a merger in the sense that a joint venture is normally a fixed duration of time and the businesses involved remain autonomous as opposed to a merger where the entities become one.

Joint ventures can happen between goliaths in an industry. It can also occur between two small businesses that believe partnering will help them successfully fight their bigger competitors and in some cases, a large company can decide to form a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain, even with plenty of cash at their disposal.

Typically a joint venture is formed for a defined period of time. It is normally understood that once  its objectives has been achieved, then the joint venture shall come to an end e.g. two construction companies may jointly bid for the tender to build a stadium.

If their bid is successful, the two companies will build the stadium and upon completion, the joint venture may be terminated.

While there are many important considerations when forming joint ventures, probably one of the most important is the choice of a business to partner with.

It is best to choose partner with a business which is compatible with your company’s business vision and whose association will be mutually beneficial to you and the partner

It is thus pertinent to undertake due diligence of the business you intend to partner with so as to increase the likelihood of the joint venture’s success. One of the key reasons why joint ventures fail is a poor relationship between the partnering businesses.

They may have divergent goals or differing philosophies. Even with similar strategic goals, two partners who lack trust in each other may lack the willingness to reciprocate.  A joint venture is like a marriage, the parties involved must be prepared to give and take.

However, unlike a marriage where parties wedding are normally not willing to contemplate divorce at the point of making marital vows, when entering a joint venture, it is advisable to envisage a point when the joint venture shall terminate.

It thus prudent to have a termination clause in the joint venture agreement which will allow the Parties involved parting ways either after they have fulfilled their objectives or because the relationship is not working.

As with all major transactions, it is advisable to seek legal advice before entering into a joint venture.

kalricardo@yahoo.com

Richard Balenzi is a lawyer

 

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