Article provided by SchoemanLaw
Small businesses are always looking for ways to grow. In this pursuit, they often team up with other businesses to provide a service or when bidding for a tender. This kind of collaboration is called a joint venture (“the JV”).
The JV Agreement
A simple JV Agreement regulates and sets out the obligations and duties of the parties. The respective businesses remain complete separate legal entities, but they collaborate to share strengths, minimize risks, and are able to pursue opportunities they would otherwise be unable to pursue on their own. It is generally a fairly short-term arrangement for the purposes of a specific project, tender or transaction, where the individual parties are not capable of delivering on the requirements of the tender.
JV agreements are usually characterised by shared ownership, shared profits and losses, shared governance or decision making, and shared risks. Each party retains ownership of their own personal fixed assets as well as their current assets. For this reason, it is important to open a separate bank account for the joint venture, as well as to keep a separate set of accounts. The parties share the expenses for the project for which the JV is formed and they also share the profits or losses of the JV.
Advantages of JVs
A JV allows businesses the opportunity to access new capacity and expertise. The business can have greater access to the market or new geographic markets. It also creates access to greater resources, including specialised staff and technology. Risks are shared with the other party of the JV.
Disadvantages of JVs
It can take time and effort to build a good relationship with another business. Where the objectives of the JV are not put down in writing clearly, issues can arise. Parties may not contribute the same levels of expertise, investment or assets and this could cause friction. Further, the differences in corporate culture and management styles may result in poor integration and co-operation.
Many small or medium business owners may think that they do not have the capacity or capability to target large projects such as tenders, however, by teaming with other like-minded businesses in the form of a joint venture the possibilities suddenly become a lot more attainable. A word of caution, however, reduce all agreements to writing and leave no assumptions on the table.
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