Entering into a joint venture agreement with another business can provide you with access to resources and skills that you may not have access to on your own. In some joint ventures, one party puts up resources or capital. With a sweat equity agreement, the parties involved bring their expertise and provide a certain amount of work instead.
Joint Venture Basics
A joint venture is a relationship in which two businesses or entities work together for a common goal. The joint venture relationship is not necessarily meant to be a permanent one as is the case with a partnership. With a joint venture arrangement, you might only work together for a single project and then end the business relationship. When a joint venture is set up, it is used as a way to help both businesses benefit in some way.
Sweat equity is the term that is used to describe the value of a business owner's work. For example, an engineer could commit a certain amount of work to a project with expertise that only he could provide. When a business owner puts up a sweat equity, he does not necessarily provide any capital that can be valued on the front end of the transaction. Instead, he pledges that he will work to get the job done.
Valuing Sweat Equity
One of the issues that must be addressed when entering into a joint venture agreement with sweat equity is valuing the sweat equity. Many times, it can be difficult to determine what sweat equity is worth. If one joint venture partner is putting up $100,000 toward a project, he wants to know that the other partner is putting up an equal amount in sweat equity. Typically, the partner putting up the sweat equity will use a figure based on foregone wages during the project. The value of sweat equity is negotiable and should be agreed upon by both partners when the contract is set up.
Outline Terms and Duration
When entering into a joint venture sweat equity agreement with another party, you must outline the terms of the arrangement and the duration of the agreement. You must set specific guidelines for how long the joint venture will last and the extent of each party's responsibility. For example, the partner putting up the sweat equity must work for a certain amount of time or until specific objectives are reached. This should be put in writing in the form of a contract in case any legal issues arise.