What are joint ventures?
A joint venture allows 2 or more persons (whether companies or individuals) to work together on a particular business project. They are most useful when the parties wish to retain their independence to carry out their main business activities, making a partnership unsuitable.
As joint ventures are designed with a specific purpose in mind, they tend to be a relatively short term arrangement.
They are also very flexible, in that different responsibilities can be allocated to the parties according to their particular strengths. So if one business partner is strong in marketing, and the other in research, the joint venture can be arranged to make the most of both teams.
Equally, though profits (and losses) are often shared equally, this is entirely up to the parties.
Types of joint venture
How you set up a joint venture depends on what you are trying to achieve.
One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company’s distribution network. The two partners could agree a contract setting out the terms and conditions of how this would work.
Another option is to set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree how it should be managed.
You could also form a business partnership or a limited liability partnership, or even completely merge your 2 businesses.
The most common approach is to enter a corporate joint venture. This involves the formation of a new company, with shares allocated to each business partner. The Articles of Association of your joint venture company are of vital importance. The careful drafting of these and of the joint venture agreement can ensure that the members of the joint venture have a clear understanding of their overall aims and purposes in entering this new arrangement.
Joint venture benefits and risks
Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects.
A joint venture can help your business grow faster, increase productivity and generate greater profits. A successful joint venture can offer:
- access to new markets and distribution networks
- increased capacity
- sharing of risks and costs with a partner
- access to greater resources, including specialised staff, technology and finance
Joint ventures often enable growth without having to borrow funds or look for outside investors. You may be able to use your joint venture partner’s customer database to market your product, or offer your partner’s services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.
A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business’ exposure.
The risks of joint ventures
Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:
- the objectives of the venture are not totally clear and communicated to everyone involved
- the partners have different objectives for the joint venture
- there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
- different cultures and management styles result in poor integration and co-operation
- the partners don’t provide sufficient leadership and support in the early stages.
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