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Nine Keys to a Successful San Diego Business Joint Venture

In San Diego, a business joint venture comes into being when two or more businesses join together to engage in some limited business activity. As an example, two businesses might join together to build a small shopping center or an office building with the idea that the two businesses will thereafter run their businesses from the center or building. Often the joint venturers bring different talents, skills, and market positioning. In our example, maybe one venturer is a small home builder and the other specializes in land acquisition and management. In any event, the joint venturers need a solid Joint Venture Agreement (“JVA”). A skilled and talented San Diego corporate attorney is needed to draft a JVA that fits the needs of the joint venturers. Here are nine keys to a successful joint venture.

Choose the Best Business Structure for the Deal

Your corporate attorney can help determine the best business structure for the deal. Various choices include an S-corporation, a C-corporation, a partnership, an LLC, and other options. The best choice depends on many factors including cost, risk avoidance, tax consequences, ease of management, control issues, and some of the issues discussed below. Choosing the best structure is one way of ensuring a successful joint venture.

Ensure Agreement on Who Controls the Joint Venture

The second key is to decide and make sure everyone is in agreement on who is running/controlling the joint venture. Many joint ventures fail when disagreements arise concerning various issues and decisions. If it is clear who is making the decisions, then often disagreements can be minimized.

Importantly, “control” is not an all-or-nothing proposition. There are many aspects of a joint venture, and the businesses involved can make different decisions for various aspects. Thus, for example, decisions with respect to financing versus decisions with respect to where to buy materials could be subject to different types of decision-making. Put another way, some “big” decisions might need approval of the joint venturers whereas many day-to-day decisions would not.

Further, “control” can be positive and negative (that is, a veto). Consider that certain decisions can be vetoed by joint venturers with a minority ownership interest.

Create Mechanism(s) for Breaking Deadlocks

The third key to a successful joint venture is to create from the start a mechanism for breaking a deadlock among the owners about various types of decisions. This is particularly important if there is 50/50 ownership. Options include finding a mutually agreeable third party to break the tie. That might be a financing partner, a respected business colleague, a trusted attorney, etc.

Ensure Complete Understanding on What Resources are Being Committed/Expected

In addition to control, a successful joint venture entails that everyone involved understands what resources are being committed to the venture and what future assets/resources are expected. If ongoing and continuing capital and resource infusion is expected, the best practice is to negotiate up front some sort of cap or limit.

Ensure Joint Venture Agreement on How Profits/Revenue are Split

Nothing makes a joint venture fail faster than an argument about how profits are to be split. Ensure that your JVA is clear on how profits are split, including various contingencies such as insufficient profits to pay back all investments. Likewise, if property — real estate, trademarks, trade secrets, or the like — have been contributed, the parties should agree what happens to those assets if the joint venture fails.

Ensure Agreement on Who Controls the Money

In a similar fashion, all members of the joint venture should be in agreement about who controls the money. This relates to money contributed by the joint venturers and to any moneys that might come in from customers or from financing.

Prepare Exit Strategies

Sometimes, despite everyone’s best efforts, the joint venture just does not work out. Other times, external events occur that prevent the joint venture from succeeding. This might be changes in law or the inability to obtain the necessary products or raw materials or, maybe, a key employee dies or becomes disabled. Thus, it is important, up front, to create exit strategies to cover various foreseeable failings. Likely, the exit strategies are different for various circumstances.

Decide If and Under What Circumstances Joint Venturers can be Added

Some exits strategies might entail a replacement joint venturer. The JVA should specify the terms and conditions of adding a new joint venture partner or transferring a partner’s ownership interest to a new entity.

Provide for Division/Apportionment of Assets Upon Termination/Dissolution

The joint venturers should decide up front how assets and property are divided when the joint venture terminates, either because of success or in the event of failure. As noted above, decisions should be made about who owns property that has been contributed. Furthermore, the joint venture itself might create valuable commercial assets such as goodwill, name/brand recognition, and trade secrets like customer lists. Rules for apportioning such assets should be set forth in the JVA.

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.

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