What is a Joint Venture?
Joint ventures can provide opportunities for growth for small businesses.
Savvy business owners looking to expand their revenue channels will keep a watchful eye for opportunities leading to growth, profitability, and additional market share. Amongst the various growth strategies available, some business owners may want to consider a joint venture. Although joint ventures are often associated with large companies or international deals, if used under the right circumstances they can be effective for small business owners as well.
Key Elements of a Joint Venture
A joint venture is created when two or more established businesses agree to pool their resources and respective talents to achieve a particular goal. Typically, joint ventures are formed for a limited period of time in order to accomplish a specific business goal. You create a joint venture by entering into a contract with another business or party; there is no formal state or federal filing required. Under a joint venture arrangement, each party contributes cash, property, assets, or other resources to the business venture and then the parties agree on how profits, losses, management, and control of the venture will be divided. Although a joint venture shares many of the same characteristics as a partnership, the key difference is that a joint venture is based on a single business transaction for a limited time period whereas a partnership usually involves a long-term, ongoing business relationship.
There are two ways to set up a joint venture. One option is for two businesses to agree to join forces and cooperate with each other in a limited and specific way. For example, one business might want to sell its product through another company’s distribution network. The two companies would enter into a contract setting out the terms and conditions of how this would work. Alternatively, two businesses might decide to set up a separate and independent business to handle the joint venture work or project. For example, two business owners might decide to form a corporation, limited liability company, or partnership to produce and sell a new product through their joint arrangement. However you decide to set up your joint venture, you will need a clear legal agreement setting out how the joint venture will work.
Benefits & Risks of a Joint Venture
Businesses often decide to enter into a joint venture because they believe that combining resources with another business will lead to better growth and profitability than either business could achieve operating on its own. Some of the benefits that businesses can provide to each other in a joint venture arrangement include:
- access to new markets and distribution channels
- added specialized expertise and resources, including research and development, and
- additional financing and purchasing power.
By taking advantage of another business’s strength in an area where your business is weak and offering a complementary benefit to the other business, a joint venture arrangement can be beneficial to both businesses. For example, if you have a product you want to sell but no sales force or presence in that market, you could establish a joint venture with a business that has an existing distribution channel or sales force capable of reaching customers for your product. Through the joint venture arrangement, you immediately gain access to customers and expand your market presence without having to hire a sales force, take on debt, seek outside investors, or otherwise commit your own resources. In turn, having a new product to market to an existing customer base is a complementary benefit that you provide to the other company.
Joint ventures are also useful where there are licenses and regulatory requirements to do business, a standard hurdle for companies trying to access foreign markets. A joint venture allows the business trying to access a regulated market to leverage another business’s established presence without having to go through the licensing and regulatory paperwork that would otherwise be required, a potentially enormous benefit to the party trying to gain access to that market.
As good as this may sound, even under ideal circumstances, there are risks with starting a joint venture. Business partnerships are complicated; be realistic about your expectations and think about whether this type of arrangement is the best option for you. You will want to make sure that your joint venture partner complements your own business' strengths and weaknesses and that you offer something to the other business as well. Performing a SWOT (strengths, weaknesses, opportunities, and threats) analysis can help identify potential areas where you might want to align your resources with another firm. You can also look at what other similar businesses have done and try to identify what they did to partner successfully. Finding the right fit takes time and effort but is a crucial step in the process. While something may look good on paper, don’t underestimate the importance of a good working relationship to the ultimate success of your venture.
Tips for Success
Success in a joint venture depends on thorough research and an analysis of the joint venture’s aims and objectives and the parties involved in the transaction. Ultimately, the joint venture must be beneficial for both parties to succeed. Here are some tips for success:
- ensure the goals and expectations of the venture are clear and agreed to by all parties
- balance levels of expertise and investment contributed by the different parties
- identify and integrate cultures and management styles of the partnering firms
- provide sufficient leadership and support, particularly in the early stages, and
- make sure the staff and everyone involved understands the purpose of the joint venture.
Joint Venture Agreement
Like any business transaction, the terms and conditions of your joint venture should be clearly laid out in a written agreement. Key provisions in a joint venture agreement should include:
- the business objectives of the joint venture
- the structure of the joint venture (whether it will be a separately formed enterprise or operated through the existing businesses)
- each party’s contributions to the venture, including cash, property, or asset contributions
- management and control of the joint venture
- how profits, losses, and liabilities will be shared
- the role of employees in the joint venture
- how intellectual property created by the joint venture will be treated
- dispute mechanism between the parties
- its duration or procedures to terminate the joint venture, and
- a confidentiality clause to protect any commercial secrets.
A formal contract is necessary for all parties’ protection and to make sure everyone understands the terms and conditions of the venture.