#1 Joint Ventures don't spread risk
Many people think that if they partner with another group to undertake a joint venture project, they can spreads the risk of the project. This could be the case if both parties to the joint venture had equal control, capability, capital and consideration. The reality is however that these elements are rarely the same for any two businesses and as such misalignment's can cause one party to need to pursue different outcomes which introduces a whole new set of risks.
Access to capital or a desire to use it is never equivalent between partners and changes over time depending on what else happens in each business. To overcome the potential misalignments, here are a few arrangements that should be included considered for any joint venture;
There needs to be clear objectives from day one. What is the JV trying to achieve in its simplest form? These objectives will assist to define how material decisions in the joint venture are made.
There needs to be defined exits from day one. If one party wishes to exit the joint venture you need to deal with how they sell their interest. The ability to exit should be restricted to certain circumstances and have regard to the overall project so that the exit does not adversely impact the project. The remaining joint venturers should have pre-emptive rights and potentially last rights to acquire the exiting partner.
Material decisions should be unanimous and made with reference to the objectives but conflict resolution arrangements should be provided to settle disputes / disagreements.
Shortfall funding provisions should be included so if one party doesn't have (or chooses not to contribute) additional capital, a mechanism is required to reward the party who contributes the capital and penalises the non-contributing partner.
Joint ventures can and do work well, especially where additional capability is required but caution is needed to ensure that the risks of entering a joint venture do not overwhelm the project when circumstances change.
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