Joint ventures and business partnerships

Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but eventually, most partnering arrangements come to an end.

It is important to consider your exit rights and options, and to the circumstances in which the joint venture could terminate. To ensure a smooth exit, it is best to decide on your exit strategy and agree termination provisions early on in the process.

Exit plan for joint ventures

Typically, a joint venture is set up to handle a particular project with specific goals. Such a venture will run its natural course and end, with mutual consent, when the project is completed.

Depending on how you agree to end the venture, you could exit by:

• selling the assets
• listing the joint venture company on a public exchange
• transferring the interests from one joint venture party to another
• selling the interests to a third party

Most joint ventures dissolve through a partner buyout where one partner either sells their stake in the venture to the other partner or buys their stake from them.

It's always best for partners to mutually agree to the termination, but this does not always happen. For different reasons, one party may wish to exit unilaterally.

It is important to agree on possible issues in advance, such as the right of first refusal in the event that one partner chooses to sell their part of the business to a third party.

Sometimes, unexpected events or changes could trigger the exit prematurely. For example:

• a partner's default - if one party breaches the terms of the agreement
• a partner's inability to operate - eg impacting their contribution to the venture
• a deadlock - if parties fail to agree on an issue or a course of action

Within your partnership agreement, you should consider all the circumstances in which the joint venture may end to help you manage separation the right way.

A typical joint venture exit clause could include:

• requiring each party to give a three months' notice prior to ending the venture
• determining agreed 'walk-away points'
• allowing one business in the partnership to buy out the other
• agreeing when individual parties may be able to force a sale
• agreeing how parties will deal with deadlocks

Key considerations when terminating joint ventures

Your agreement should set out exactly what happens when the joint venture ends. For example, it should specify:

• how you will divide assets and profits
• how you will share intellectual property
• how you will continue to protect confidential information
• who will be entitled to any future income arising from the joint venture's activities
• who will be responsible for any remaining liabilities, eg debts and customer guarantees

Even with a well-planned agreement, there may still be issues to resolve. For example, you might need to agree on who will continue to deal with a particular customer.

Good planning and a positive approach to the negotiation may help you arrange a friendly separation. Find more tips to help you plan your joint venture relationship.