While Bill’s business had been steadily growing for a while, over the last several months, business started to plateau and even fall slightly.
So, being an industrious CEO, Bill looked for opportunities that could help revive growth. He contemplated the prospect of a joint venture with another company and explored how such an arrangement could be beneficial to both parties.
Bob to the Rescue?
Bill decided to create a joint venture with his friend Bob Vance’s company. It appeared to be a perfect match! Bill had the staff and skill set to do the work and Bob spoke of the many potential clients that he could bring to the table. However, each wanted to keep their own entities, so they created this informal functional joint venture (i.e., they didn’t create a new legal entity). They didn’t enter into a formal, written joint venture agreement as Bill and Bob had been friends for years and Bill trusted Bob. And in fact, things seemed quite promising for their new joint venture during the first few weeks as Bob talked endlessly about all the great opportunities he would bring to them.
Unfortunately for Bill, however, the old adage that all good things come to an end came true and this “great” joint venture turned pretty bad pretty quickly. Bill soon realized why Bob had so many potential clients and it was because he underbid his projects.
Bob had previously been in another joint venture but that joint venture partner left Bob because he’d fail to compensate the previous company fairly.
Bill didn’t know any of this, but in a fit of remarkable good fortune, Bill insisted that all contracts be in Uh-Oh’s name, so he would have a bit more control over things. Bill’s seemingly good foresight turned into a big mess come the first client that Bob had brought to Uh-Oh. Bill hadn’t vetted the pricing and only after agreeing to and signing the contract with the client did Bill realize that they had wildly underbid the contract and he wouldn’t make any money at all.
Bill and Bob argued daily about how to remedy this situation. Then, unexpectedly, but not unsurprisingly, Bob walked and found a new joint venture partner, stealing the client and a several of Bill’s employees after he broke off the JV.
The Momentum Law Group Perspective
There are two types of joint ventures that are most common in business today: project joint ventures – working on a defined project together with a clear end – and functional (also referred to as horizontal/vertical) joint ventures – jointly utilizing staff, storage, transportation means, etc. Joint ventures, particularly functional joint ventures, are tricky in nature. Unlike a business partnership where both parties become a singular legal entity, two separate legal entities agree to work on a project or with shared resources while operating as one. However, without a formal agreement outlining the legal bounds of the overall relationship, there is nothing to guide the parties in the event of a dispute and if they cannot work it out amicably then, then litigation becomes likely.
Before starting work on a joint venture, it is important to enter into an agreement that clearly defines what each joint venturer is responsible for, as well as how the parties will handle the winding down of the JV. Further, we suggest including restrictive covenants, such as non-solicitation of client(s) and employee(s), confidentiality provision, and perhaps a non-interference provision, in order to protect the interests of the parties.
Blog Posts from Uh-Oh Enterprises are cautionary tales from Momentum Law Group. Bill Wiseacre and his family are fictional characters representing real life situations that keep entrepreneurs like Bill from reaching full potential. #donotbelikeBill
