Teaming up with another business can be a lucrative way to maximise efficiency and profits. But joint ventures need to be managed carefully and documented well to avoid major pitfalls and legal problems.

Choose a good match for your business

It’s important to choose a business that’s a good match for your business. A publisher of legal books might team up with a website that offers legal advice. The publisher can provide content in exchange for a banner ad. A hair salon with extra space may team up with a nail shop to provide a complete hair and nail salon.

Remember that each of you stands to gain, and possibly lose, profits as a result of teaming up. For this reason, it’s absolutely essential you have a written agreement.

Create a written agreement

Your agreement should start off with a mission statement and the nature of your venture together. It should detail the length of the agreement. Is it until a certain project is complete, or is it ongoing for several years?

Additionally, it’s important to be specific about exactly what each business is bringing to the venture: cash, facilities, inventory, supplies, services, consulting, people, and so on. And detail not only what each company is bringing, but how much each company is bringing to the venture and when. Spell out specific deadlines and expectations.

Venture management

Other questions your agreement should cover are: How will the venture be managed? Who will be in charge of what? Who can speak for the venture? Who will bill customers? How will money be collected?

Profits

How are profits defined? How will they be divided? When it comes to this part of the agreement, you may want to consider the advice of an accountant who can come up with an appropriate formula.

It may be a strict 50/50 sharing or it may be more complicated based on who is bringing what to the venture. Professional assistance with this can help avoid major problems down the road. And like profits, you want to carefully outline how losses will be allocated.

Financial records

Consider these important questions as well: How will finances be handled? Will you each keep accounts? Will someone outside combine the two? Or will you turn all the accounting over to a third party—a bookkeeper, for example, or an accounting firm?

Insurance

Don’t forget insurance. What insurance will be carried, and who will pay for it? Make sure real estate, equipment, vehicles, supplies and inventory are covered.

Liability insurance is important as well—it covers injury to people or property damaged by your joint venture. Finally, make sure you provide worker’s compensation insurance for all employees.

Decide now what will happen in the future

Think ahead of the game and consider what happens when the venture is over.

How will assets be split? How will equipment, copyrighted material, trade secrets, clients and contacts be dealt with at the end?

Taking time to clarify these issues now will prevent large and expensive legal problems in the future.