What is a Joint Venture + How Does it Benefit Business Owners?
What is a joint venture?
A joint venture is an agreement between two or more businesses to coordinate their resources for a specific task. This task can be a project or other business activity. The parties to the joint venture can agree on an informal arrangement or they can opt for something more official. There is no time limit for a joint venture agreement, so they can either be long-term or short-term.
Generally, the joint venture is a distinct business unit where the parties supply assets and decide how the agreement will be managed. Business owners who are part of a joint venture agreement are expected to share profits, losses as well as the day-to-day management.
Every joint venture is different to account for the needs of the parties involved. However, the following are commonalities between most joint venture agreements:
- Scope of the joint venture operation.
- Number of business that will be involved.
- Organization of the joint venture.
- Details of each party’s contributions.
- Control and management of the joint venture.
- Arrangements for when the joint venture is complete.
- Staffing arrangements for the joint venture.
The difference between a joint venture and a partnership
It is easy to confuse a joint venture with a partnership. Although these types of business agreements are similar, there are some differences. One of the key differences between a joint venture and a partnership is that businesses only come together for a specific task or project for a joint venture. Every party in the joint venture keeps their business. Usually, a partnership involves different parties coming together to run one business. Therefore, a partnership involves two or more people forming and operating a single business.
Formal joint venture agreements
If you decide to enter into a formal joint venture arrangement, you will need to create a joint venture agreement. This document provides details of the rights and duties of all the parties. The joint venture agreement must also clearly set out the aims of the joint venture, the contributions of the parties, the liability for losses and the entitlement to profits. Ideally, you should seek the advice of a lawyer when writing a joint venture agreement to prevent breaches that may result in legal action.
Reasons to form a joint venture
Business needs are constantly evolving, therefore, business owners need to identify ways to remain competitive.
Here are some reasons for choosing to enter into a joint venture agreement:
- To join-up your expertise. The speed at which technology advances makes it difficult for businesses to be proficient in all areas. A joint venture that shares expertise can benefit businesses that are skilled in only one area but requires input from other companies with separate skills.
- To save on costs. Businesses can enter into a joint venture agreement to split the costs of a particular expense.
- To integrate resources. A smaller business might enter into a joint venture with a larger business to access more resources. In this situation, the larger company could benefit from the smaller company’s list of targeted customers.
Joint venture considerations
While joint venture agreements can provide a host of benefits, you should carefully consider the following before committing to a joint venture:
- Legal aspects – Even with the best intentions, business relationships can become troubled. To put yourself in the best position, make sure your joint venture agreement lists all assets, clarifies objectives and responsibilities and is reviewed by a legal professional.
- Financial considerations – This may be one of the most important aspects of the joint venture agreement because all parties hope to benefit financially. It is not a given that a joint venture will attract an equal split of revenue. Business owners may find that they are taking on the majority of the work that produces profit. If this is the case, a decision should be made about profit allocation.
- Business culture elements – Every business has a unique culture, which could result in problems if not planned for when the joint venture agreement is created. You need to consider the impact of culture on how you and the other parties will fulfill the terms of the joint venture.
- Research requirements –You should be thorough in your research and due diligence before entering into a joint venture relationship. Research your potential joint venture partner’s credentials to determine their ability to perform their obligations under the joint venture agreement.
Three steps to forming a joint venture
In order to get the most out of a joint venture agreement, you need to be very clear on your goals:
1. The first step is for you to decide what you need a joint venture partner to do. You must determine what you want from the relationship, as well as what you can offer your joint venture partners.
2. After you are clear on your needs, it is time to identify potential joint venture partners. You should start your search with your current network because it is likely that they will share some of your goals. You can also use professional social media, like LinkedIn, or business Facebook groups to find suitable joint venture partners. At a minimum, you should be able to answer the following questions about a potential joint venture partner:
- Is the business financially sound?
- What is the status of their reputation with suppliers, other businesses and customers?
- Are your business practices compatible?
3. When you have conducted your preliminary due diligence and are happy to go forward with the joint venture, you should hire a lawyer to create the joint venture agreement. This will cover both you and your joint venture partner in the eventuality that things do not work out.
15 benefits of joint ventures for business owners
One key benefit of joint ventures is that you gain advantages, while keeping the rest of your company separate.
Here are some additional ways that you can benefit from joint ventures:
1. Acquire new skills
A joint venture has a higher chance of success when both parties share their skills. As you provide your expertise, you will learn how your joint venture partner approaches different aspects of business. You can then use this insight to improve your business processes.
2. Low-cost or free advertising
You can benefit from cheaper or free promotion and advertising with joint ventures. There may be opportunities to cross-market yours and your joint venture partners’ products or services. This helps to extend your market reach to new potential customers.
3. Shared costs and risks
Just as you share profits, you will also have the benefit of sharing risks and costs. If the joint venture fails, then you will not be solely responsible for any expenses. This is advantageous for your business because it protects your cash flow and profits.
4. Obtain discounts
Your joint venture could result in you making savings on supplies. Your joint venture agreement could include provisions for knowledge-sharing as well as a reduction on products and services.
5. Trial a new product
Your joint venture agreement could include clauses to help you test new products. You can arrange for your joint venture partner to introduce your new product to their customers. You could provide a sample or sell the product at a discounted price. You will need to coordinate methods to collect feedback in order to improve your product.
6. Cut down on employee recruitment costs
You can negotiate the use of some of your joint venture partner’s employees for specific tasks. For example, if your joint venture partner is an expert in Human Resources (HR), you can make an arrangement to receive HR consultancy in exchange for your expertise.
7. Increase product gains
It could be hard to develop technology or intellectual property in your business. Entering a joint venture with companies that have the necessary resources will help you to increase your product or service offering.
8. Develop business relationships
A joint venture will deepen your relationship with your joint venture partner and will also increase your connections to other businesses in your industry. You should use your joint venture to grow your business network at every opportunity.
9. Reduce inventory and stock
You can get rid of excess stock by giving away inventory to your joint venture partners as part of a cross-promotional deal. This is a great way to make space for new stock.
10. More opportunity to break into new markets
It can be challenging to expand into new countries and territories if you are working on your own. Joint venturing with businesses local to the region that you are trying to break into can be advantageous. You will benefit from your joint venture partner’s local knowledge and by being associated with an established and trusted business.
11. Short learning curve
Trying to acquire the knowledge and expertise for a new project could be expensive and time-consuming. Joint ventures help to reduce your learning curve while still gaining business benefits.
12. Reduce competitors
Joint ventures help you to better compete with businesses with more resources and bigger budgets. Additionally, you will also have less competition because you have pooled your resources with another company.
13. Additional business flexibility
Your joint venture can be as short or as long as you and the other parties want. This flexibility enables you to initially try a short-term project with your joint venture partners. If this project is successful, you can enter into a longer-term agreement. The flexibility of joint ventures helps to protect your company against liabilities and losses.
14. Quicker business growth
If you choose the right joint venture partners, you have the potential to grow your business at a low cost. You can form joint ventures with as many businesses as you can handle, which will lead to more business exposure and growth
15. Save money
A joint venture is a good way to save money on various business costs. You can split the cost of advertising, promotion, marketing and any other business expenses that you and your joint venture partner agree on.
Downsides of joint ventures
Despite the numerous benefits of joint ventures, there are also some disadvantages that accompany this type of arrangement, including:
1. Culture clashes
Although you may have done the right amount of due diligence, it can still be difficult to determine how a company works day-to-day. A clash of cultures can result from different management styles and conflicting employee needs.
2. Undependable partners
Your joint venture partner may not be as reliable as you would like. This could be because they have new and competing priorities, which take precedence over the joint venture project.
3. Resource imbalance
It is impossible to enter into joint ventures with businesses that have the exact amount of resources as your company. However, the disparity between your business and your joint venture partners may only become apparent after you start working with them. You may find yourself taking on the majority of the work because your joint venture partner is simply not in a position to do more.
Despite the downsides, there are still many benefits to entering into a joint venture agreement. You are able to mitigate most of the negative aspects of joint ventures by seeking reputable legal advice. Because there is so much at stake, you should take your time to assess what you want and whether the business you have chosen can provide what you need.
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