Joint ventures sometimes fall apart

On Behalf of | Jul 26, 2022 | Business Disputes, Business Litigation |

There is hopefully a sense of optimism when launching each new joint venture. If all goes as planned, each party will benefit from the collaboration. However, things do not always go well, and the venture can fail due to mistakes and disputes.

Seven common issues

The details of each dispute are unique, but there some common themes occur time and again:

  • Rapid consumption of capital: New businesses (even those run by experienced people) can go through the money at an alarming rate, particularly when there are lofty goals or unanticipated expenses. The partners should prepare for this potential issue and plan on what additional funding sources are acceptable.
  • Control issues: Many like the idea of collaboration, but fewer are good at it. Compromise can be challenging for decision-makers accustomed to complete control over how to run a business.
  • A desire for assets: Those entering a joint venture may offer up more control in favor of a more significant capital contribution upfront. As time passes, they may come to regret their decision if they lose control over critical aspects of the venture.
  • Different approaches: Different companies have different work cultures with other priorities (work-life balance, tradition vs. innovation, etc.). Ideally, these are complementary or synchronous, but this is not always so. It can lead to tension because they have different ways of doing things.
  • Unrealistic goals: Quick growth and profits may seem attainable at the outset because of the combined assets and know-how, but goals may differ. An example is paying loans instead of keeping or reinvesting profits.
  • Unhealthy competition: Executives, managers or staff may envy or mistrust the colleagues they are supposed to work with collaboratively. It can be petty (not helping or not sharing information that could benefit others), or it can even lead to professional dysfunction, an ineffective team and failure.
  • No exit strategy: Many focus on what will happen when the joint venture is a success, so they may not consider a plan if things do not go as planned. They may find that they or others want to jump ship, leaving their contract unfulfilled or breached.

Joint venture agreements can address these issues

Partners or partnering companies should consider the above and other issues when drafting a joint venture agreement. A fair and comprehensive contract that considers all foreseeable outcomes can avoid frustration and disputes once the venture gets off the ground. Even then, it may still be a matter of holding partners accountable in court for their actions.