Good Fences, Good Neighbors
In most lifespans of a successful business there comes a time when opportunities arise to partner with another entity on a business-related venture. Often times these start out as simple subcontractor relationships between one farm and another, perhaps to have one farm grow feed for the neighbor’s dairy operation. Over time they can grow into formal relationships that result in any variety of joint venture opportunities. If done properly, joint ventures can be mutually beneficial to all parties. If not done well, the effect on both businesses can be devastating, not to mention forever tarnished relationships.
Dr. Shannon Ferrell, associate professor of agricultural economics at Oklahoma State University, offers advice on how to create joint ventures that last. His comments were made at a recent Cornell Dairy Executive Program conference.
First, have a business plan for your own operation. “Think hard about what you want to accomplish with this joint venture,” Ferrell says. “For you to answer that question, you first need to understand your own business plan.” From there you can better understand if entering into a joint venture would benefit that plan.
If the answer to that question is yes, then build a joint venture agreement. Start by listing the specifics of what you and your prospective partner want to accomplish with the joint venture. Ferrell says that in addition to thinking about the goals of the venture, think about the scope as well. “Identify what the joint venture will do, and what it will not do,” he says.
In most instances, you will be entering into a joint venture with another entity, perhaps another dairy farm, that does very similar things to what your business already does. “Think carefully about the sacred realm of that joint venture,” Ferrell says. “We don’t want to step on the toes of our joint venture partner and end up competing with them when we are trying to cooperate.”
Also document what each party will bring to the joint venture relationship. What assets is each party delivering? How are finances and/or capital being applied? Are any employees needed specifically for the joint venture?
Ferrell says to make it perfectly clear that the joint venture is not a partnership. “To the IRS and to the courts, joint ventures look a lot like partnerships. If they think it is a partnership, then they will label it as such and that brings certain liabilities and tax implications,” Ferrell says.
Other things to include in a joint venture contract:
- Be clear who is part of the joint venture and who is not. “Be sure that the proper legal entity that is intended to be part of the joint venture is the one that is named in the agreement,” Ferrell says.
- Identify when the agreement begins and when it ends. Ferrell says there is always an option to renew the agreement, but having an end point to the contract helps parties evaluate the success of the venture and if one party wants to depart the agreement.
- Description of assets. Who is going to contribute assets to the venture? When and how will they get those assets back if and when the venture dissolves? Will the venture have to acquire assets? “Remember that assets owned by the joint venture make it look a lot like a partnership,” says Ferrell.
- Define decision authority. “Determine how decisions are going to be made on a daily basis, and how decisions get made when there is a deadlock,” Ferrell says. He suggests creating a group of stakeholders, preferably in odd numbers to avoid ties, that can vote on major decisions regarding the joint venture.
- Decide where future capital comes from. “If the joint venture needs an infusion of capital to take advantage of an opportunity, or even to stay solvent, do you have the power to require participants in the joint venture to contribute?” Ferrell says. “And if they don’t contribute, what are the consequences?”
- Know when and how to disperse revenues. This should be based on a pre-determined policy of the joint venture members and is often based on a ratio of the contribution of each party to the joint venture.
- Understand what events could cause the agreement to end. Know what violations could trigger dissolution of the agreement.
- Consider a separate entity. The creation of a limited liability company (LLC) or corporation for the joint venture can provide liability protection and make accounting and decision-making for the venture easier.
While a handshake sill may be as good as gold for any farmer, any joint venture should include a formal contract. If nothing else, Ferrell says it forces all parties to have a conversation about what could go wrong and how to resolve it. “You can solve a lot of problems before they are problems by having the conversation.”
“Don’t be your own lawyer and accountant,” Ferrell says. “When it comes to something that really is in the depth of their expertise, spend some money for that expertise because it is going to save you money in the long run.”