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What should I consider before getting into a joint venture.

By: Satwinder Singh

A savvy way to generate huge profits, a joint venture is a separate entity. It comes in to being when several or two different businesses join hands for mutual profit. All the companies involved share control over the venture, and all matters to with it. But their unrelated business activities remain unaffected and carry on like they did before it existed.

A joint venture is a strategic business alliance. The idea is to join with a business that has complementary capabilities. Finance, technology, distribution, and personnel are all capabilities. If you have great distribution channels but lack the financing, you might be able to form a joint venture with another business that has very good financing capabilities but lacks distribution.

The idea behind joint ventures is mutual benefit. Everyone involved should walk away with something desirable. However, a joint venture can quickly go sour if the companies have different ideas. So, before forming a joint venture, there are a few things that you should hammer out before the papers are signed.

Do a background check

It is always better to check the credentials of any business associate you're dealing with. And this is all the more true with joint ventures, it puts your reputation on the line. Their public image and reputation will reflect on you, as their associate in business. So do cross-check their credentials with other people and companies. And establish beyond doubt that there is a strong foundation for trust. This will allow you to assess whether the company can and will be able to follow through on its commitments to the venture.

Build a Business Plan

All parties involved should take part in developing a business plan for the joint venture. The plan should be developed using a short list of prospective partners. It should also clearly define the goals of the venture, and how success will be defined. The plan should also contain a mutually agreeable exit strategy and terms of the joint venture's dissolution. Provisos for an unexpected dissolution before the term is up should also be included.

Appropriate Structure

You can register your joint venture in a variety of different ways. A Limited Liability Corporation is one option as are other types of new businesses. Many fast growing companies choose to register their joint ventures as strategic corporate partnerships. Investigate all your options before making a decision.

Availability of Property and Resources

It is important to explicitly understand exactly what resources and property (appreciated or depreciated) are available from each member of the joint venture. Which resources will each company make available? Is there a specific use of one party's property? Proper understanding of availabilities will forestall a weakening of the economics of the deal later on down the road.

Special Allocations

In the event that special allocations need to be made, this needs to be decided beforehand. These items include special gain or loss, and also includes income and deductions. If there is a loss, some of that will need to be allocated to each of the partners. Additionally, compensation to the partners that provide specific services should also be determined beforehand.

If these issues cannot be worked out, maybe it is time to partner with someone else. If you can work out all of these issues satisfactorily before you form a joint venture, then you will likely find success in a profitable partnership.

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