Written By: Jeremy Busch-Howell*, member of the Board of Directors
In an earlier post I discussed joint ventures, strategic partnerships and mergers as strategic alternatives that non-profits should consider as part of their strategic process, and how such strategic alternatives are particularly relevant in our current economic climate. In this post I will discuss certain matters that should be considered prior to entering into a joint venture or strategic partnership (for ease, joint ventures and strategic partnerships will be referred to jointly as “joint ventures”, recognizing that there are certain differences between the two).
Joint ventures arise in any number of ways, both informally and formally, and can include both non-profit and for-profit organizations. They can spring to life when two organizations work together to host a single event for a limited duration with limited impact. Joint Ventures can also be long-term engagements formalized pursuant to a written agreement providing for the pooling of resources and the collective provision of services, and can even include the creation of an independent legal entity supported by two or more organizations.
The benefits of a joint venture can be significant. A joint venture between non-profits can save valuable resources while increasing the impact of programs and services. From the non-profit’s perspective, a joint venture between a non-profit and a for-profit entity can provide access to resources that may otherwise be unavailable in the non-profit industry, and may increase ties to funders increasing the viability of the non-profit generally.
There are also risks in engaging in a joint venture. The most obvious risk is the failure of the project, which wastes valuable resources and harms the reputation of all organizations involved. In addition, engaging in a joint venture, especially with a for-profit entity, may affect the tax treatment of any non-profits involved. To mitigate these risks, ensure your non-profit has a clear understanding, and all parties to the joint venture are aligned, on the below points:
- Objectives. Clearly define the goals and objectives of the joint venture. Ensure the objectives of the proposed project align with those of your non-profit as well as those of the counterparties to the joint venture. Determine whether these goals and objectives are obtainable in the environment within which the project will occur. Use the above to clearly establish the scope of the project, including duration.
- Values and Brand Alignment. It is important to have a clear understanding of who it is you will be working with. Ensure that the objectives and reputation of the counterparty align with or compliment your own. Consider whether culture or fit will become a barrier to integration between the parties and thus a barrier to the success of the project.
- Resource Allocation. Ensure that the parties understand the resources each will need to provide in order to make the project successful. Clarifying the allocation of physical, human, financial and knowledge based resources will allow the parties to determine both the cost and the viability of a proposed joint venture. Depending on the scope of the project, consider engaging in due diligence to determine whether the counterparty has the capacity to engage in and perform as required by the joint venture.
- Organizational and Operational Structure. Determine the governance structure of the joint venture. In particular, clarify decision making authority, staffing and any other considerations that may be specific to the project. When issues arise, having a defined structure in place will reduce conflict and streamline the resolution of the issue.
- Agree. It is incredibly important that the parties to the joint venture agree on the above points, as well as the allocation of any other risks or benefits of the project. Depending on the scope of the project, consider formalizing the relationship among the parties with a written agreement that sets forth all relevant considerations. The process of codifying the relationship between the parties may assist in aligning the expectations of each party.
- Consider Obtaining Professional Advice. Depending on the scope and nature of the project, particularly where it involves a joint venture with a for-profit entity, it is important to determine that the joint venture will not adversely affect the tax positioning of the non-profit. In addition, there may be unknown liabilities that need to be resolved or risks that need to be allocated which the parties to the non-profits may not be aware of.
While a joint venture is a strategic alternative that may assist in lowering costs, increasing impact, or both, it may be the case that a joint venture is not sufficient to resolve any significant financial or organizational difficulties a non-profit is facing. In addition, depending on the parties involved, it may be the case that a joint venture is not a sufficient degree of integration between the parties to increase the community impact of both organizations.
In a later blog post, I will discuss certain key drivers for, and matters to be considered in connection with, a merger.
Engaging in a joint venture or strategic partnership may have significant legal and tax consequences. Non-profits are encouraged to obtain the advice of legal counsel, accountants and other professional advisors before initiating such a transaction.
*As a corporate lawyer with McCarthy Tétrault, Jeremy shares his expertise in corporate finance, mergers and acquisitions and corporate governance with Propellus. His ambition and pragmatic nature enrich the effectiveness of our board. When he isn’t working, which he admits is rare, he enjoys spending time with his young family.