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For many business owners and executives, a time comes when they see an opportunity to grow their business into new market segments or geographical areas; however, they lack the financial, technical or human resources to do it on their own – at least without great risk. This is often the time when a business starts thinking about creating a strategic alliance or joint venture.

By teaming up with another business that has complementary resources and capabilities, a company may be able to gain a competitive advantage and grow its business more quickly and efficiently than going it alone.

Strategic alliances and joint ventures offer potential opportunities to businesses of all sizes. They may provide companies access to unfamiliar or untapped markets, technology and expertise without prohibitive up-front costs, and the prospect of sharing costs and risks with another party. But with the potential benefits come a myriad of risks that should be carefully considered prior to forming a strategic alliance or joint venture.

A strategic alliance might be as simple as two separate companies teaming up on a shared marketing strategy or contracting to supply products or services to each other. A joint venture, on the other hand, typically involves the creation of a separate legal entity and the sharing of risks, profits, losses and control (though not necessarily on a 50/50 basis).

Although strategic alliances and joint ventures can vary tremendously, the issues that should be considered in advance are surprisingly similar. A small, family-owned business considering a joint marketing platform with a complementary service provider should be thinking about many of the same issues that will concern a multi-national conglomerate preparing to enter into a joint venture with an international partner.

Some things to consider before entering into any strategic alliance or joint venture agreement are:

Due diligence

Carefully check the credentials of any company being considered as a partner in a strategic alliance or joint venture. Be sure that any financial or reputational risks have been identified and understood.

Do the potential partners have the financial resources to deliver what they promise? What is their reputation in the marketplace, and is it one with which the company would want to be associated? Would their company culture or, in the case of an international joint venture, their national culture, be a good fit? Do values align? Are management styles similar?

Structure

Determine the structure of the desired relationship. If a company’s needs can be satisfied without entrance into an equity-sharing arrangement, then it’s probably better off entering into a contractual relationship (such as a supply contract or shared technology agreement). A true joint venture can be expensive to set up and undo.

Governance and management control

Be explicit about who will have the authority to make decisions and how disputes will be resolved. Equanimity in decision making may seem attractive; however, will anything get done if both parties have to approve every decision? Establish clear authority for certain actions, and subject only other, pre-specified major decisions to unanimous or supermajority approval.

Obligations and contributions

Identify the relative contributions of the partners. Strategic alliances and joint ventures come in all configurations, from those that require equal contribution of financial resources to those that contemplate varying contributions of financial and human capital or other assets (such as technology, trademarks or access to distribution channels). It is crucial that both parties understand and agree up front on what each one will contribute to the venture.

Asset ownership and distribution

It is equally important to determine up front who will own or have the right to use key assets during and after termination of the venture. For example, if one party has valuable intellectual property to offer the venture, will that IP be transferred or licensed to the venture? If the venture creates intellectual property, will one party have the right to own the IP after termination? Should the other party receive a license to use the IP? And if so, what will the terms be?

Other important considerations that should be addressed in advance include:

• Sharing of income and expenses

• Handling of customer service issues

• The term of the venture and the rights/consequences of terminating early

• The ability of the parties to compete with one another during and after the venture

All of these important considerations and decisions should be documented in a definitive written agreement(s) between the partners.

While it may be tempting to leap into a strategic alliance or joint venture for benefits, it is important for business owners and executives to consider these issues in advance. The time and effort will justify their worth in the end.

Marco Materazzi is a business attorney at Tonkon Torp. Contact him at 503-802-2126 or at [email protected].