What are the best practices for creating a joint venture that benefits both parties?

Defining objectives of any venture should also include what success will look like, how will it be measured over time and most importantly, scenario planning.

Joint ventures are not an end in themselves, but must be a means to an optimal solution. To this end, it is important to first have a clear objective for the company's business, and then to have a clear division of roles between partner companies that are complementary to each other in order to achieve that objective. Only when these are clear can the approach of the two parties in the joint venture be made concrete.

Creating a thriving joint venture requires transparent communication, shared objectives, and mutual trust. Clearly define goals in alignment with both parties' strategies. Craft a detailed agreement outlining roles, responsibilities, and contributions. Maintain open communication to swiftly address challenges. Regularly assess performance and be adaptable. Prioritize transparency and collaboration for long-term success, ensuring a harmonious partnership that fosters sustained growth and shared achievements.

There should be inherent synergy or a strong ‘why’ behind each of the parties’ involvement in the venture. Checking track record, past and present, market share and strengths, consumer perceptions, current JV partners, appetite for risk, business vision, talent pool, culture and skills needed for success all become key facets to choosing the right partner.

The first step in finding the right partner is to clarify the goals and objectives of the business. Next, clarify the functions in which the company excels and the functions that require support from other companies in the business, and find a partner that can store these functions. If the company can also have the same objectives and goals for the business, then the partnership is designed with equal weight; otherwise, the appropriate weight is adjusted between the two parties.

This is key because it has a bearing on the motivation, depth of commitment and time horizon of the parties. This also defines how they “take out their share of value” from the partnership and who will be the lead partner. Proportionately, rights and obligations of each party are written. For e.g. - in equity JV, parties commit to taking on risks, costs, profits/loss of the venture in line with their shareholding. Payback occurs via “dividends” after net profitability is achieved. Whereas, in “licensing”, the licensor (of the brand, tech or content) usually charges a “fee” or “margin” to the “operational expenses” of the P&L. The licensee alone carries the risk and reward, the licensor has already got paid off in line with agreed terms.

Adjustments from a joint venture legal perspective depend not only on the ownership percentage, but also on profit adjustments, human resource investment, and the degree of ongoing support in the areas of development, sales, marketing, and administration. Furthermore, while the business assets (brand, name value, industry position, patents, rights, awards, etc.) other than sales generated are retained in the entity, the effective impact on these assets may also need to be contractually defined.

In order to maintain appropriate and effective communication among partners, the following points are important (1) To establish a system that allows for multifaceted discussions by having members from multiple sections participate in each party. (2) Communication among members should be operated in a transparent manner, such as threads by section or topic. (3) Thread managers for each section and topic should be assigned from both parties, and progress can be managed in parallel in the promotion thread of the entire project where these managers gather.

When concluding a contract, it is necessary to discuss and incorporate into the contingency plan as well as the risk sharing ratio and the method of sharing the risk for each of the major risks assumed by both parties, and to incorporate these into the representations and warranties of both parties.