The partner has been found, goals have been agreed - but the next step in the collaboration is still not the joint venture agreement. The next important milestone on the way to a successful collaboration is the so-called "term sheet".
Once the right joint venture partner has been found, an open exchange of mutual wishes and objectives has been achieved and the company's own "can and must" goals/limits have been documented [Blog article JV Part 3 “Goal congruence”], the joint venture can become more operational. At this point we would like to point out again: “The joint venture contract comes at the very end” (…if it is still needed at all, because with good preparation you could almost do without the classic joint venture contract).
At this point in time, we recommend a two-pronged approach:
- Go into the operational implementation, the technical planning of the joint venture and parallel
- Take your time and negotiate a so-called “term sheet” with your Indian counterpart.
1.Operational implementation and technical planning
It makes sense to start implementing the joint venture at this stage of planning. For example, have technical staff travel to the joint venture partner and inspect the conditions on site, and have the product manager plan the so-called "shop floor" level or the plant layout. If there are already significant problems in these areas, this is an important indication for you.
2.Term Sheet
Indians know the “term sheet” – but what they are not used to is joint negotiation, the open search for common ground.
What is a term sheet?
A term sheet in joint venture (JV) negotiations is a non-binding document that sets out the basic terms and conditions of the planned cooperation. It serves as a template for the legally binding contracts that will be drawn up later
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External design of the term sheet
The term sheet should be formally designed as follows:
- it should be formulated concisely and comprehensibly,
- multi-column in table form
- contain all important points of cooperation.
This gives the negotiating parties a clear overview of the key agreements at all times.
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Content of the term sheet
In terms of content, you and your future joint venture partner should list the most important regulations and details of the specific collaboration in the term sheet.
- Who brings what to the joint venture? How much are our financial contributions?
- What about naming rights? What about your unique selling points?
- Which technologies are contributed by whom and which are shared?
- Who has which ownership rights? Who contributes the land and what is its value?
- Which governance structure do we choose? What corporate culture do we want to live, what management style do we want to establish? [Blog article JV “Why Joint Ventures in India really fail”]
- Who exactly gets which decision-making powers? … [Blog article JV “Strict calculation – good friends”]
- How do we distribute profits and losses? Who measures them?
Limit yourself to the essentials. In our experience, Indian negotiating partners tend to want to clarify too many detailed questions and, in an almost theatrical way, direct the focus on possible "breaking points" instead of on the actually crucial questions.
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Develop an exit strategy
Use the positive mood to negotiate mutually fair exit strategies during this phase. As you know, 80 percent of all joint ventures fail within the first five years of cooperation. Against this background, it only makes sense to talk about a possible end during the start-up phase.
When and at what point do we want to separate? What method will be used to calculate the respective shares and who is allowed to sell them to whom and when?
Probably critical aspects should be discussed openly, separated from any side issues.
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Neutral mediator
A mediator is a neutral intermediary. He has neither his own interests in the outcome of the negotiations between the parties nor does he pass judgment. Our tip is therefore to deliberately leave lawyers out of the negotiations on the term sheet and, if necessary, to bring in a neutral mediator as a kind of "communication aid". If an open, fair agreement on equal terms with your Indian partner is not possible at this point, later cooperation with all its ups and downs is likely to fail.
The aim should be to avoid legal disputes (especially in India). Arbitration clauses are not binding and, in our experience, they unnecessarily prolong legal proceedings and lead to the "death of the joint venture". The involvement of lawyers with their often certainly important legal perspective is of little help at this point.
