Joint venturing can be one of the fastest ways to jumpstart your business. Instead of relying exclusively on your own resources, a joint venture (JV) allows you to tap into established partners who may have superior marketing, sales, production or operational capability. This empowers you to seize opportunities that would be beyond your grasp if you were going it alone.
To put this powerful strategy to use, you should first understand the joint venture definition and how it can be applied tactically. Here’s an explanation of what is joint venturing, why JV relationships can be beneficial, how joint ventures work and how to succeed at joint venturing.
What Is a Joint Venture?
You can define joint venture partnering as a business project undertaken by two or more companies in pursuit of a mutually profitable goal.
Joint venturing first grew popular in the United States in the 19th century, when railroad companies with connecting tracks pooled ownership of their freight cars to improve efficiency and cut costs.
A more recent example of joint venture partnering is when Japanese electronics manufacturer Sony partnered with Swedish mobile phone manufacturer Ericsson to produce a new company, Sony Ericsson Mobile Communications (now known as Sony Mobile), dedicated to producing mobile phones with superior digital photography and multimedia capability.
This move leveraged Ericsson’s long experience in the mobile phone market and Sony’s electronics expertise, drawing from the resources of both companies and enabling them to gain a greater market share than either could on their own. This ultimately positioned Sony to become a major player in the smartphone industry.
In this example, Sony and Ericsson formed a new business entity to pursue their joint venture. But in many cases, two companies pursue common goals through contract agreements without necessarily forming new joint venture companies.
For instance, movie studios such as Disney often partner with restaurant chains such as McDonald’s to offer cups or toys promoting new movies.
Other joint venture examples include car companies pooling research, music labels partnering with streaming media services and businesses sponsoring sports teams.
What It’s Not
The definition of joint venture should not be confused with that of business partnership. A business partnership is a specific type of legal entity, distinguished from sole proprietorships, LLCs and corporations. A joint venture can involve any of these types of business entities as well as partnerships. Two companies may enter into a joint venture in their original form as separate legal entities, or they may form a new entity specifically for the purpose of the joint venture.
Why Use Joint Ventures?
Now that we’ve explained what is joint venturing, it’s easier to understand why companies enter into this type of arrangement.
Joint venturing can offer multiple advantages, including:
- Enabling companies to reduce their financial burdens by splitting costs.
- Allowing businesses to share research and development to gain an innovative edge.
- Enabling companies to share infrastructure resources and technical expertise.
- Empowering partners to pool resources for branding, promotion and distribution.
Joint ventures can also have disadvantages, such as:
- One partner may end up sharing more of the financial burden than the other.
- One partner may seek to gain a competitive advantage over the other by hijacking shared research for individual gain.
- One partner may benefit more from the relationship than the other.
- A failed venture may damage the branding and finances of both parties.
Companies considering joint ventures should weigh these pros and cons carefully and take steps to minimize potential risks.
How Do Joint Ventures Work?
When companies enter into a joint venture relationship, the process typically unfolds through a series of steps:
- First, one company spots a potential joint venture opportunity and begins scoping out potential partners.
- Next, the initiating company approaches potential partners with a pitch proposing a mutually beneficial working relationship, and a negotiation process begins.
- If the two companies agree to pursue a joint venture, they then draw up a contract or form a new business entity to formalize the JV relationship, allocating shares and tax responsibilities according to the chosen structure.
- Once the joint venture begins, the two companies begin collaborating according to a mutually agreed-upon operational plan.
- After a designated goal is reached, or if the joint venture does not work out as intended, the companies involved may choose to end their partnership.
If two companies find their joint venture relationship is beneficial, they may choose to extend it indefinitely, or they may enter into additional joint venture enterprises. In some cases, a joint venture may involve more than two companies working in coordination.
What Are Some Keys to Successful Joint Venturing?
Succeeding at joint ventures requires smart planning to avoid common pitfalls. Some keys to success include:
- Considering potential partners carefully and evaluating multiple prospects in order to pick the right partner.
- Crafting a compelling pitch to prospective partners to persuade them that the joint venture is worth their while and will be mutually beneficial.
- Selecting a business structure for the venture, whether in the form of a contract or a new business entity, which allocates resources wisely and distributes responsibility and risk fairly.
- Developing an efficient collaboration plan that taps into the strengths of both partners while avoiding managerial disputes or inefficient duplication of tasks.
- Including an exit plan in the joint venture contract in case the venture does not go as planned.
A well-conceived joint venture strategy should cover all these bases to maximize the odds of the venture succeeding to the benefit of all parties involved.
How Do You Finance Joint Ventures?
An effective collaboration plan between joint venture partners needs to include a feasible financing plan in order for the enterprise to succeed.
One advantage of joint venturing is that it can leverage the financial resources of both partners. For instance, if one partner has a stronger credit rating than the other, this may prove helpful for seeking a business loan or line of credit.
Credit rating implications should be factored in when deciding whether to pursue a joint venture through a new business entity or through a contract without a new business entity.
It’s also critical for both partners to agree on how to allocate financial responsibility for the joint venture, including tax responsibility.
In some cases, the wisest course will be for both partners to contribute equally to financing the venture. In other cases, it may prove prudent for a partner with greater financial resources to bear the brunt of financing responsibility, while the other partner contributes resources such as technical expertise or marketing capability.
Joint Ventures Can Jumpstart Your Business
Joint ventures let two or more companies pool resources to pursue a common business goal for mutual benefit. This can represent a great way to capitalize on a project, share research and development, pool infrastructure and expertise or leverage partners’ marketing capability.
Succeeding at joint venturing requires following sound best practices, including choosing partners carefully, approaching partners with a compelling case for joining forces, selecting the best business form for pursuing the venture and following a strategic operational plan for implementing the project.
A successful joint venture also depends on a smart financing plan. Fast Capital 360 offers business loans and lines of credit to help your joint venture plan succeed. To apply for financing, use our online application process or talk with us.