Joint venture: definition, examples, pros & cons

The idea of businesses operating in isolation is being relegated to the past. Today’s business are increasingly collaborating with other companies on joint ventures – pooling their resources and expertise to develop new products, expand into different markets or increase operational capabilities.

A joint venture allows businesses to grow and gain access to markets or expertise beyond their existing capability. By teaming up with another company, many small businesses use joint venture agreements to share specialised expertise, such as technical skills or intellectual property, as well as spread the risks and costs of developing a new market or product.

Joint ventures are usually formed by two businesses with complementary strengths. For example, a technology company may create a partnership with a marketing company to bring an innovative product to market. An overseas business could join forces with a local distribution company in order to sell its products in that local market.

Joint ventures can dramatically increase the reach and scale of both businesses while reducing the risk. However, they aren’t without their pitfalls and poorly conceived partnerships can harm both parties. It pays to understand what joint ventures are, as well as their advantages and disadvantages.

What is a joint venture?

At its most basic, a joint venture is when two or more businesses agree to work together. It’s effectively a commercial agreement between two or more participants, usually entered into in order to achieve specific business goals such as launching a new type of business or selling products into a new market. Each company maintains their separate business structure and legal status, with joint ventures creating a new, jointly-owned child entity that is effectively at arms reach from the parent companies.

Joint ventures aren’t restricted to limited companies, either. Any number of companies or individuals may collaborate on a joint venture, and these agreements can involve all types of business structures including sole traders and self-employed individuals, limited companies and limited partnerships. Joint ventures don’t need to be equally split between partners, either, with different partners able to hold differing stakes.

Joint ventures usually have a defined timeframe or outcome, such as a one-off project – although they can also encompass long-term partnerships. They should ideally benefit all parties, growing businesses or providing additional revenue streams that would be impossible without partnering with another business.

Why form a joint venture?

There are lots of reasons why your business may consider entering into a joint venture with other business partners, including:

  • New product development – Companies and individuals can bring different levels of expertise and skills to a joint venture that can aid the development of products and services that otherwise would be difficult for a company to create on its own.

    For example, an independent solicitor and a small accountancy firm might work together to create a new business specialising in tax affairs for business startups. Services or products created through such ventures can either be marketed by both business partners, or the joint venture may operate independently with its own management team and marketing. Joint ventures such as these can potentially broaden a customer base and result in additional revenue.

  • Expanding into new markets – Breaking into new markets, from new territories to new demographics such as the over 50s, can be difficult without being able to draw on businesses that have already established a presence in the target market. Joint ventures are often formed when an international business is looking to move into a local market. They will partner with a business offering local expertise in logistics, distribution or retail to establish a supply chain and route to market. Supermarkets often form joint ventures to set up new, local supermarket chains in new countries, such as Tesco creating a joint venture with China Resources Enterprise in China in 2014.
  • Bundling products and services – Bundling one company’s products and services with those of a partner can create a single offering that better suits the needs of customers and delivers more value, making it more competitive. This can increase sales and gain market share at the expense of competitors.
  • Partner endorsement – A less complicated type of joint venture, partner endorsement sees one business endorse and recommend the products and services of its joint venture partner. This is similar to an affiliate relationship, where revenue is shared on any referrals from one business to another.
  • Shared marketing – Pooling resources such as marketing budgets can help a collection of smaller businesses access greater reach and more effective marketing channels than they could by themselves. Pooling resources on a larger campaign can benefit all parties.
  • Co-sponsoring events – By spreading the cost of sponsoring an event with a joint venture partner, each company can get more bang for their buck. Smaller businesses can reap more exposure, publicity and customers leads by teaming up with a larger more well-known partner, giving more credibility to your business.

Joint venture advantages and disadvantages

Joint ventures can be complicated arrangements. While they offer strong advantages to businesses, they can be fraught with risk – from a lack of transparency and trust to culture clashes than can be a drain on resources and harm operations for both parent companies.

Advantages

  • Stronger together – Properly set up, the best joint ventures effectively leverage both parties’ assets and strengths, while diluting weaknesses. The result is a joint venture that brings the best of both worlds.
  • Time limited – Joint ventures usually have a defined timeframe. Their temporary nature means it doesn’t tie businesses together for eternity, and exit clauses mean it can be simple to dissolve a joint venture if it isn’t working out.
  • Diversification and scale – Joint ventures allow each partner to operate at a larger scale than possible individually. This can mean access to a larger market, more diverse product and service offerings, or more effective supply chains. It allows a business to move quickly into a new market without having to develop new products and services from scratch, reducing costs and time to market.
  • Pooled risk – All businesses involved in the joint venture share a proportion of the risk, with all parties working to a shared goal. This can dilute the risk that an individual business would face by going it alone, and if the venture fails, means that sunk costs are shared between invested parties.

Disadvantages

Businesses aren’t natural bedfellows. Most companies are geared towards competition, which can make working together a challenge.

  • Culture clash – Many joint ventures flounder due to a clash of cultures, processes and approaches when two companies work together. Differing management skills and abilities, conflicting HR processes and workplace cultures can make it hard for joint ventures to successful mesh.
  • Decision making – Trust is vital in any joint venture – which can make decision-making more difficult if both parties need to sign off decisions when there is a lack of trust. Poor decision-making and second-guessing the other party can lead to failure.
  • Privacy and sharing information – A joint venture inevitably involves a degree of knowledge sharing that can mean a lack of control over your intellectual property. To ensure that trade secrets or other sensitive corporate information isn’t made public, ensure non-disclosure agreements are in place from the outset.
  • Unequal commitment – Ideally a joint venture should be an all-for-one and one-for-all proposition. A lack of commitment from one of the partners can create an unbalanced joint venture.

Joint venture agreements

There are no laws specifying how joint ventures should be agreed. They can take whatever is best suited to the circumstances – though a clear legal agreement should be put in place prior to any joint venture being created.

Get legal and financial advice before entering into a joint venture agreement. Have a written agreement in place that sets out the objective of the venture and the expectations and management of the project. It should also outline what happens if there is a dispute between partners.

If you want something more definite then consider setting up a separate limited company or a limited liability partnership. If the joint venture fails with debts or it’s the fault of your partner, your business won’t be liable.

Exiting a joint venture

Some joint ventures continue as long-term relationships, but in most cases they have defined timeframes. Once the project’s objective is achieved the joint venture agreement comes to an end with mutual consent. However, to ensure a smooth end to the agreement, it’s essential to have an exit strategy in place.

A exit strategy can form part of the legal agreement, and includes how assets would be sold or how one partner in the joint venture can buy out the other partner. It’s vital to draw up a legal agreement that includes details such as notice period one partner has to give to another if they want to exit, how issues and disputes are resolved, and giving either party right of first refusal to buy the other partner out.

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