What should you know before exiting a joint venture?

1 Exit options

Depending on the nature and terms of your joint venture agreement, you may have different exit options available to you, such as selling your stake to your partner or a third party, buying out your partner's stake, dissolving the joint venture and liquidating the assets, spinning off the joint venture as a separate entity, or merging the joint venture with another entity. Each of these options has its own pros and cons that should be evaluated based on your objectives, expectations, and obligations.

2 Exit triggers

An exit trigger is an event or condition that allows or requires you to exit the joint venture. Common examples of exit triggers include expiration or termination of the joint venture agreement, breach of contract or fiduciary duty by your partner, change of control or bankruptcy of your partner, failure to meet performance or financial targets, dispute or deadlock between the partners, and regulatory or legal changes that affect the joint venture. It is important to identify and anticipate the potential exit triggers and how they will affect your rights and obligations.

3 Exit mechanisms

An exit mechanism is a process or procedure that governs how you will exit the joint venture. This may include clauses such as valuation methods and formulas for determining the fair market value of your stake, pre-emption rights and drag-along or tag-along rights for selling or buying shares, dispute resolution and arbitration methods for resolving conflicts or deadlocks, confidentiality and non-compete obligations for protecting the joint venture's intellectual property and business interests, and transition and post-exit arrangements for transferring assets, liabilities, employees, customers, and suppliers. You should take the time to review and understand these exit mechanisms in your joint venture agreement to guarantee that they are fair, clear, and enforceable.

4 Exit costs

Exiting a joint venture can involve significant costs, both direct and indirect, such as legal and professional fees for drafting, reviewing, and executing the exit documents and agreements, tax liabilities for transferring or disposing of your stake, financial penalties or losses for breaking contracts or commitments, operational disruptions and inefficiencies for separating the joint venture's activities and resources, and reputational damages and relationship strains for ending the partnership with your partner or other stakeholders. It is essential to estimate and budget for these exit costs and try to reduce them as much as possible.

5 Exit risks

Exiting a joint venture can also expose you to various risks, both internal and external. Potential exit risks include legal disputes, regulatory or compliance issues, competitive threats, strategic gaps, and cultural or organizational clashes. It is important to assess and mitigate these risks and prepare contingency plans for dealing with them. Failing to do so could mean missing out on the joint venture's synergies and competitive edge, as well as potentially facing violations of exit requirements or obligations.