Joint venture, a foreign adventure

A joint venture can be a smart way to establish a presence in a foreign market. This is an agreement between two or more parties that may or may not be from the same country about achieving a common goal. Working together means that you can make maximal use of each other's knowledge and network, but be mindful that even fairytale marriages can end up in divorce.

A joint venture is not a legal form like a bv (PLC), but a domestic or international legal agreement between parties with a particular purpose in mind. Nor is it a merger, because the parties involved remain companies in their own right.

• Benefits
• Disadvantages
• Agreement

Common goal

You establish a joint venture to achieve a common goal, such as a temporary project resulting in the construction of a rail tunnel. Once the rail tunnel has been built, the project is complete and the joint venture ends. You can also team up to work on a long-term project, like the strategic partnership between Douwe Egberts and Philips that culminated in the launch of Senseo.

Your common goal could also be to expand abroad: you bring the knowledge, products, and technology, while your overseas partner provides complementary products or services, market knowledge, and distribution channels.

Benefits

With a joint venture, you are essentially joining forces with another company. So what benefits can you expect?

• Economies of scale, such as procurement discounts.
• Combining products or services, like with Senseo.
• Access to each other’s knowledge, technology, and manpower. A good joint venture produces a win-win situation, in which you reinforce each other and both perform better.
• Partnering with a local company may also make it easier to land government contracts.

Disadvantages

Working together can lead to conflict and even culminate in an acrimonious divorce. Why?

• Apart from the joint venture, both partners also have their own companies to run, which can create conflicting interests.
• Alternatively, one of the partners may be negligent or go bankrupt and fail to honour their commitments,
• or conflict may arise about control.

Prevention is better than cure

Make good agreements about common goals, profit sharing, control, and how to handle disputes, should they arise. If you start an international joint venture, you will have to familiarise yourself with local rules, so that you know where you stand if you get drawn into legal proceedings. A Dutch company that opted to expand to the United Arab Emirates, for instance, may end up having to plead its case before an local court in Arabic. If you are not prepared, you are immediately at a disadvantage.

Large-scale projects

When is a joint venture an interesting option? We asked Chris Dijkstra, director of tax and legal consulting firm Watermill Tax & Legal to explain. “Dutch business owners mainly enter into a joint venture with a local partner for large-scale, construction-related projects, such as the construction of a subway line.

Dijkstra also recommends a joint venture approach for businesses looking to establish a distribution channel abroad. “Suppose you wanted to supply large hotel chains in a country that has banned direct import. With a joint venture, you would still be able to do business there. Alternatively, if you wanted to sell poffertjes - small Dutch pancakes - in the United Arab Emirates (in Dutch), you would need a local sponsor.”

Finding the right partner

Find the right partner, get to know each other, move in together and then decide whether to get married. Dijkstra advocates taking things slow at first, instead of committing to a joint venture right away. “Businesses tend to look for difficult solutions to simple problems. They think big, while an easy fix is at hand. If you export simple products that are sold on locally, I would first recommend working with an agent or distributor. Take it slow at first and draw up a sound contract. Only when you absolutely have to join forces or if you are required to do so by a government, should you start considering the next step and enter into a joint venture.”

Foreign legal systems

When you enter into a joint venture abroad, you will have to deal with a foreign legal system and different rules on taxes, for instance. So is it a good idea to enter into a joint venture abroad with a Dutch bv (PLC)? Dijkstra recommends opting for a local legal form instead of a Dutch one. “Your customers are more likely to trust a company with a legal form they know, so establish a local business and use this to enter into a joint venture. This approach also helps you prevent difficult legal issues with regard to taxes and the like.”

Agreement

You have found an ideal partner, there are opportunities to be seized, and you are raring to go. Do not just dive in, but remember to sign a prenup first. Sit down together and decide what to lay down in writing in order to prevent nasty surprises further down the road.

What to lay down in writing

According to Dijkstra, contracts should always be tailored to the situation at hand. “Both parties have to feel comfortable with the contract.” A contract should include at least the following:

• Purpose; what do you want to achieve with the joint venture?
• What products or services will you create or provide?
• What markets will you enter?
• Targets; how much revenue and profit do you want to achieve?
• Financial arrangements; such as investments and profit and loss sharing.
• How will decisions be made?
• What law applies to legal disputes? Your country’s law, or your foreign partner's?
• Competition, relationship, and confidentiality clauses; are you allowed to partner up with a competitor if the joint venture does not work out?

Local laws and regulations

Different countries have different rules for starting a company. The country you have your eye on, for instance, may have different legal forms than the Netherlands. Familiarise yourself with foreign legal forms and local laws and regulations and make sure to seek legal and tax advice, preferably with an organisation that knows both the Netherlands and the other country.

Countries eager to attract foreign investors often have an investment agency. Familiarise yourself with the investment rules in your country of choice. Some governments, for instance, set requirements for the share ratio within a joint venture, demanding that the local company own at least 51% of the joint venture and that foreign companies own no more than 49%. These requirements vary from country to country. Agencies can help you navigate procedures and provide information about special investment measures, business locations, and economic zones with interesting benefits.

Support

When you first start investing abroad, you can enlist support and assistance. Complete the subsidy and funding guideto find out which schemes could help your company. SME businesses, for instance, can use a knowledge voucher issued by the Support International Business scheme to have some of their costs reimbursed. With this online voucher, you can pay an advisor of your own choosing for international legal and tax advice.