Economy & Finance

Do your joint venture homework

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A2004 Harvard Business Review article titled “Launching a World-Class Joint Venture” noted that more than 5,000 joint ventures (JVs) and many more contractual alliances had been launched worldwide in the five years leading up to the article. The article went on to point out that the JV’s success rate was on par with the general success rate of mergers and acquisitions — not very good.

With further support from an article in the September/October 2012 CFMA (Construction Financial Management Association) Building Profits publication “Critical Issues to Consider Before, During, and After a Joint Venture,” JVs are increasingly popular due to the slow economy and the ability for the JV to offer a company access to a new market, new technology, additional financing or bonding, increased depth in management of projects, needed customer contacts, minority ownership qualification or other key attributes.

The first two steps of forming a JV — the due-diligence stage and the setup stage — are critical.

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“What does entering into a JV arrangement bring us in attempting to carry out our mission?”

This first step should include a thorough due-diligence process that investigates the prospective partner’s financial strength and capacity in the financing and, if appropriate, bonding areas. In addition, consider the corporate cultures and whether both JV partners share compatible approaches to safety, quality, ethics and other critical issues deemed important by management.

Is there a history of legal claims against the prospective partner? What past JV experience have other partners had with the prospective partner? These are just a few of the questions that should be probed in the due-diligence stage.

In the setup stage, after the management team has decided the prospective partner is a good fit, it is time to outline the details of the JV. The operating agreement must define the type of business structure: partnership, limited partnership, limited liability corporation (LLC) or some other form of ownership. How will the partners divide the ownership percentages of capital, division of annual profits and who will control the management decisions of the JV? How will the initial capital contributions be structured, and will they be in the same percentage of ownership? Who will manage the operations of the JV and how will we define responsibility for key management functions in the areas of accounting, safety, billing and information technology, just to mention a few.

The JV agreement should establish financial management authority, and it should outline what liabilities and risk areas will be insured as well as how indemnification in certain areas will be handled. A tax matters person must also be designated in the agreement, and there are key tax elections that must be decided in the first year of operations. The success or failure of a JV often is determined in the due-diligence and setup stages. Make sure you surround yourself with qualified advisers and an attorney experienced in drafting JV agreements to guide you down the path to creating a successful joint venture.
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