Around the world, businesses looking to grow their operations, expand their influence and increase their market presence are entering into joint ventures with other firms. Joint ventures are structured strategic partnerships created with specific goals and results in mind.
They have the potential to lead to growth and development for all types of participating businesses, from small- to medium-sized businesses to large corporations. Here is an overview of the potential joint venture benefits and the considerations that accompany them.
What Is a Joint Venture?
A joint venture consists of a partnership between two or more businesses where each party is invested in terms of capital contribution, the time devoted to the project and the effort put forth to complete the defined task. While the outcomes of JV’s can benefit member businesses, JV’s operate as their own individual entities.
By definition, a joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests.
A JV can take the form of a small, separate project designed to meet a specialized purpose, or it can take the form of a new company. Many businesses use JV’s to diversify their own offerings by eventually absorbing the JV’s intellectual property, financial outcomes and more.
Joint Venture Benefits
While there are a wide variety of joint venture benefits to companies of all sizes, I will focus specifically on how JV’s can be especially advantageous for small- to medium-sized businesses.
It is common for joint ventures to occur between larger organizations and much younger, smaller businesses. By collaborating with a larger company, smaller businesses gain from the expertise of the larger one while increasing their credibility and sharing the financial burden (and profits) of a new venture. There are also many joint venture benefits for JV’s that are conducive to smaller businesses that seek to “join forces” in order to compete with larger corporations.
- Shared costs: Each partner contributes equal amounts of initial capital to the project, alleviating some of the financial burden placed on each company
- Shared expenses: Each partner takes on project-related costs to the project or new business, generally in equal amounts unless otherwise pre-specified
- Shared returns: By sharing upfront costs and expenses associated with the project, JV member are also entitled to share in the returns and profits
- Expertise and knowledge gain: Businesses often bring specialized expertise and knowledge to JV’s that can be shared among members
- Product and intellectual property gains: Critical intellectual property, technology or other resources are often difficult to build in-house. Businesses then enter into JV’s with businesses that possess these resources in order to share access to such assets
- Enhanced credibility: Younger businesses, including startups, as well as small businesses struggle to build market credibility and thus a strong customer base. Forming a JV with a larger, well-known brand can lend the smaller business increased credibility
- New market penetration: In some countries, local regulations preclude foreign companies from entering except through partnering with a local business
- New revenue streams: Small businesses have limited resources and capital for growth projects. By entering into a JV with a stronger, more established partner, the small business can expand its sales force and distribution channels, resulting in larger, more diversified revenue streams
- Shorter learning curve: Building the knowledge and expertise necessary to operate in key target markets is both time-consuming and costly. Partnering with a business that has the specific domain expertise required for entering target markets can allow JV members to reduce the time it would take to develop the expertise otherwise
- Barriers to competition: Collaborating with other companies to drive market penetration builds barriers to competitors that are effectively difficult to permeate
- Larger market reach: Companies with similar or nearly identical products can collaborate via a JV to encompass a larger market reach than they would have previously had access to
What to Consider when Entering into a Joint Venture
Along with the potential many joint venture benefits, there are details that need to be considered before a joint venture goes live. Due diligence, legality issues, the results of potential financial valuations and cultural differences should all evaluated before businesses enter into joint ventures.
Conducting due diligence on any potential partner is a top priority for businesses considering joint ventures. Before entering into agreement with another company, JV or otherwise, strategic businesses always check into the credentials of potential member(s), including the existence and availability of the resources, property and human capital that potential partners bring to the JV.
Successful JV members also carefully list the details of their partnership in a legal document before launch. This includes all assets, tangible and intangible, as well as an overview of the objective of the partnership. It is highly recommended that such documents be formed by experienced legal advisors.
In an ideal world, everything would be split 50/50. Each partner would invest equal amounts of tangible and intangible assets, and the resulting profits would be divided equally. But this is not always the case. Sometimes during the course of a JV things become somewhat one-sided, for example when one party brings additional and more relevant ideas that result in higher profits. In this case, how would profits be distributed: would they still be split 50/50? This type of potential outcome, among others, should be considered at the start of the JV along with the best way to divide outcomes for each case.
Businesses operate differently in different regions. Businesses entering into a JV with partners from other regions understand the cultural operations of their partners and make sure that each party is satisfied with the terms of the JV, including the valuation of the outcomes.
These considerations should be put to paper in the legal arrangement prior to beginning the partnership.
When and Why JV’s Dissolve
Joint ventures are not necessarily permanent business structures. They can be dissolved under the following circumstances:
- The overall goal for establishing the JV has been met
- The JV is not capable of meeting the overall goal of the partnership
- The partners have developed new goals or desired outcomes that are no longer consistent with the original plan
- The agreed upon time frame for the JV has ended
- Legal or financial issues for one or more partners
- A change in market conditions that makes the JV irrelevant or impossible to pursue
- One of the members has been acquired, rendering the initial JV contract null and void
Post dissolution of a JV, each partner company receives their pre-negotiated portion of the tangible and intangible assets and continues on with their standard business operations.
Grow Your Business through a Joint Venture
There are certainly many considerations to keep in mind when deciding whether to pursue a JV, and consulting with the proper legal counsel prior to establishing the agreement is crucial. Taking the time to fully understand the process, evaluating potential outcomes and conducting due diligence on potential partners are three great first steps in moving forward with a joint venture. While all of this may seem overwhelming for a small business owner, joint ventures, if executed thoughtfully and correctly, can lead to new revenue streams, shared resources and incredible results.
Are you ready to reap the many joint venture benefits and in the process of searching for the right business to partner with? Powerlinx’s matching engine searches the world’s most trusted businesses to find you the right strategic partner. Learn more about what your business could gain through Powerlinx.
Featured image by David Wall