I am often queried about what terms should be considered by companies that are considering entering into a merger, partnership or joint venture (which I will describe in this article as “Joint Venture”).  Here are a few items that are highest on my list.

1.     Come to basic terms on the revenue/cost arrangements

If the parties can try out a relationship for mutual benefit with a fee-sharing or royalty arrangement, such a trial would be valuable.  Not all costs can be determined up front on an experimental arrangement, however, each party should be frank about its desired financial outcomes so there is no confusion down the road.

 If all costs cannot be determined up front, perhaps a trial or “pilot” project would be helpful in fleshing those out.

2.       Date Before You Get Married:

There are a lot of things that could go wrong in a partnership – lack of seriousness, poor cultural fit, lack of diligence, poor quality teams, inability to deliver one’s end of the bargain, and so on.

Consider if there is a way to try out the relationship without “opening the kimono”.  Information should be freely shared if it will assist in the success of the joint venture, but the parties should be careful not to give away company trade secrets until such time as the joint venture is a proven success.

Rather than preparing detailed merger agreements, the parties could put in place an agreement on the basis of “guiding principles”, which is broad and high-level in nature (while still containing certain binding terms, including “confidentiality”, “non-circumvent” and “non-solicit” (among others), to protect a party’s leads, opportunities and key employees, should the joint-venturers decide to part ways).

 A preliminary agreement of this nature can assist the parties to get to the “get to know each other” stage.

3.     Transparency on costs and revenues

This point is intuitive – all parties should receive frequent and periodic financial reports to understand whether the arrangement is sensible.

4.     Preservation of the original brand

In terms of shared branding, the parties can consider acting jointly under a different “brand name” to preserve the brand value of the original entities, or at the very least, moving forward in a way that does not dilute or “park” any of the existing brands.  Many brands will operate under a “sub-brand” to price-discriminate or for expansion reasons, this thinking can be adopted by potential joint-venturers.

These items, the desire to negotiate in good faith, luck and timing will aid in the success of a Joint Venture.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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