When a Joint Venture Might be a Better Alternative to a Merger or Acquisition

Mergers and acquisitions (“M&A”) can be effective methods of expanding your San Diego business into new markets and customer bases. However, merging with or buying another business are both risky endeavors. Depending on the circumstances and the market goals, one less risky alternative is to explore a possible joint venture with the target business or businesses. In this article, we discuss the benefits of a joint venture and how those benefits can reduce the risks associated with mergers and acquisitions. Joint ventures can also be seen as a precursor to M&As — a trial run, so to speak. A good San Diego corporate attorney can help you and your business explore the options.

San Diego Corporate Law: Joint Ventures can Provide Advantages Similar to M&As

Typically, a joint venture is a focused business endeavor that is often limited in time and scope. The joint venturers generally form a specific corporate entity, create a detailed Joint Venture Agreement, contribute assets to the new joint venture — or allow access to the assets — and begin operations. Often the businesses “loan” production and managerial employees to the joint venture. Since joint ventures are a form of partnership, any profits and/or losses are shared by the parties to the joint venture agreement as set out in the agreement.

As can be seen, if structured correctly, joint ventures can provide many advantages that are similar to the kinds of advantages that can be obtained — and that are often sought — with a merger and/or acquisition. These include:

• Access to new a customer base, geographic markets, and/or market channels
• Trial-run access to and ability to share unique experience, knowledge, expertise, and technology/methods
• Low risk evaluation of production, sales, and/or managerial talent
• Cost and resource sharing — including intangible resources and assets
• Division of labor/expertise in new market exploration/penetration
• And more

Minimizing risks is accomplished via a well-drafted joint venture agreement. For example, it is important that the joint venture agreement clearly specify the initial and subsequent capital contributions and any other in-kind contributions. In this manner, the risk to the various parties is “maxed-out” at an acceptable level. In a similar manner, if employees will be “shared,” then the joint venture agreement must have clear specification on which employees, which duties, how much time can be demanded of those employees, etc. It is also crucial to limit the term of the joint venture. This is crucial for reducing risk. If the joint venture is a success, it can always be extended. If the joint venture is a failure or only a moderate success, a clearly stated temporal endpoint is needed so that the parties can exit without a huge risk of ensuing litigation. As noted, a good San Diego corporate lawyer can provide advice and counsel and can draft a solid joint venture agreement that effectuates the needs of the joint venturers.

San Diego Corporate Law: Joint Ventures as Trial-Runs

As noted, a joint venture can serve as a valid test and trial-run in the lead up to a possible merger and/or acquisition. Here are some of the most important aspects:

• Verifying a “culture fit” — every business is run with its own “style” and not all “styles” fit and mesh
• Verifying the proper staffing and personalities
• Verifying the viability of the new markets, products, etc.
• Verifying the cost and profit models

Contact San Diego Corporate Law Today

If you would like more information about joint ventures and drafting joint venture agreements, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provides legal services to business owners in San Diego and the surrounding communities.

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