Entering a joint venture can be one of the fastest ways to jumpstart your business. Instead of relying exclusively on your own resources, a joint venture agreement allows you to tap into established partners who might have superior marketing, sales, production or operational capability.
Here’s an explanation of what is a joint venture and how they work as well as the advantages of one.
What Is a Joint Venture?
A joint venture is a business project undertaken by 2 or more companies to pursue a mutually profitable goal. It could empower you to seize opportunities that would be beyond your grasp if you were working alone.
Joint Venture vs. Business Partnership
Don’t confuse a joint venture with a 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 company structure, including partnerships. Two companies can enter into a joint venture in their original form as separate legal entities or form a new entity.
How Does a Joint Venture Work?
When companies enter a joint venture agreement, the process typically includes the following steps:
- A company spots a potential joint venture opportunity and begins scoping out potential partners.
- The initiating company approaches potential partners with a pitch proposing a mutually beneficial working relationship, and a negotiation process begins. In some cases, a joint venture may involve more than 2 companies working in coordination.
- If the companies agree to pursue a joint venture, they draw up a contract or form a new business entity to formalize the partnership, allocating shares and tax responsibilities according to the chosen structure.
- Once the joint venture begins, the companies collaborate according to a mutually agreed-upon operational plan.
- After a designated goal is reached (or the partnership doesn’t work as intended), the companies might choose to end their partnership. However, if the companies find their joint venture agreement is beneficial, they could extend it indefinitely or enter into additional joint venture enterprises.
Did You Know?
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.
Types of Joint Ventures
There are 2 main types of joint venture agreements; they are:
Project Joint Venture
In a project joint venture, a company joins 2 or more businesses to collaborate on a specific project. The joint venture partnership ends when the project’s goal is accomplished. This is the most common of the types of joint venture agreements.
Functional Joint Venture
This is a mutually beneficial joint venture agreement where each business brings a unique feature that improves efficiency for the other. Functional joint venture examples include Disney or other movie studios partnering with restaurant chains, such as McDonald’s, to offer cups or toys promoting new films and businesses sponsoring sports teams.
Joint Venture Examples
A 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, 2 companies pursue common goals through contract agreements without necessarily forming new joint venture companies.
Other joint venture examples include NewsCorp, Disney and NBC Universal forming Hulu, car companies pooling research and music labels partnering with streaming media services.
Benefits of a Joint Venture
There are multiple advantages of a joint venture, 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 might end up sharing more of the financial burden than the other.
- One partner could seek to gain a competitive advantage over the other by hijacking shared research for individual gain.
- One partner could benefit more from the relationship than the other.
- A failed venture could damage the branding and finances of both parties.
If you’re considering a joint venture agreement, carefully weigh the pros and cons and take steps to minimize potential risks.
Keys to a Successful Joint Venture
Some keys to success include:
- Carefully considering potential partners and evaluating multiple prospects before making a selection.
- Crafting a compelling pitch to prospective partners to persuade them that the joint venture is worthwhile and will be mutually beneficial.
- Selecting the right company structure, 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 task duplication.
- Including an exit plan in the joint venture contract in case the agreement does not go as planned.
How Do You Finance Joint Ventures?
An effective joint venture partnership must include a feasible financing plan to ensure the enterprise’s success.
Leveraging the financial resources of both partners is a big advantage to a joint venture agreement. For instance, if your partnering business has a stronger credit rating than yours, it can prove helpful for seeking a business loan or line of credit.
Factor in credit rating implications 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 is for both partners to contribute equal financing to the venture. In other cases, it could 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.