There are a few adages that come to mind when thinking about joint ventures. “Two heads are better than one!”, “If you can’t beat them, join them!”, “United we stand!”, etc.
There are times in the business world that one must make alliances even with competitors to achieve ones goal.
A joint venture may be defined as a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. Each party is responsible for profits, losses and costs associated with the joint venture. However, the venture is its own entity, meaning it is separate and apart from the parties other business interests.
Though they may seem similar, there is a difference between a joint venture and a partnership. One key difference is that while a partnership generally involves an ongoing, long-term business relationship, a joint venture is usually based on a single business transaction or project.
Joint ventures are widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign company would like to enter. Usually, the foreign companies bring new technologies and business practices into the joint venture while the domestic companies already have the relationship and requisite government documents within the country along with being entrenched in the domestic industry.
In a joint venture, both parties are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place. Parties to the joint venture must be committed to focusing on the future of the partnership rather than just immediate returns. In order to achieve this success, honesty, integrity and communication within the joint venture are necessary.
A joint venture can be brought about in many ways. The following are some of the more common ways:
- A foreign investor buying an interest in a local company.
- A local firm buying an interest in an existing foreign firm.
- Both foreign and local entrepreneurs jointly forming a new enterprise
Some joint venture partners may wish to formalize the venture by creating a new joint venture company or Special Purpose Vehicle. SPV’s can be very flexible entities in which partners each own shares and agree on how they will be managed.
However, more common are joint ventures agreements that do not include the formation of a new entity. Instead, the venture is operated through the existing legal status of the venture partners. Since the joint venture is not a legal entity, it does not enter into contracts, hire employees or have its own tax liabilities. These activities and obligations are handled through the co-venturers directly and are governed by contract law.
The joint venture agreement must clearly specify the parties mutual responsibilities and goals. The contract is crucial for avoiding trouble later. The parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits and a duty to share in any losses incurred. Each joint venture has a fiduciary responsibility, owes a standard of care to the other members and has a duty to act in good faith in matters that concern the common interest of the enterprise.
A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member or if a court decides that serious disagreements between the members make its continuation impractical.
The chief concern with joint ventures is that they can restrict competition, especially when they are formed by businesses that are otherwise competitors or potential competitors.
Among the most significant benefits derived from joint ventures is that parties to the venture save money and reduce their risks through capital and resource sharing. Joint ventures also give smaller companies the chance to work with larger ones to develop, manufacture and market new products. They also give companies of all sizes the opportunity to increase sales, gain access to wider markets and enhance technological capabilities through research and development underwritten by more than one party.
However, it is advisable to approach joint ventures cautiously. Though a joint venture may be valuable in nourishing a company’s growth and stability, smaller businesses usually have far less margin for error than multinational corporations. It is recommended that business owners considering a joint venture with another or other establishments should launch a small joint venture first to test the relationship without committing large amounts of money. Sometimes when companies with different structures, corporate cultures and strategic plans work together, the differences make it difficult to work together smoothly. So testing the possible relationship first before committing to it is usually a wise move.
It is also advisable that a small business investigate its prospective partner or partners thoroughly including interviews with prior joint venture partners, suppliers and customers.