A joint venture involves two or more businesses pooling their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared.
The reasons behind forming a joint venture include business expansion, development of new products or moving into new markets, particularly overseas. A joint venture could give you more resources, greater capacity, increased technical expertise, access to established markets and distribution channels. Entering into a joint venture is a major decision. This guide provides an overview of the main ways in which you can set up a joint venture, the advantages and disadvantages of doing so, how to assess if you are ready to commit, what to look for in a joint venture partner and how to make it work.
The essential features of a joint venture can be listed as follows:
- It is formed by two or more persons.
- The purpose is to execute a particular venture or project
- No specific firm name is used for the joint venture business.
- It is of a temporary nature. Hence, the agreement regarding the venture automatically stand terminated as soon as the venture is completed.
- The co-venturers share profit and loss in the agreed ratio. However, in the absence any other agreement between the co-venturers, the profits and loss are to be shared equally.
- During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.
Types of Joint Venture
One option is to agree to co-operate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners could agree to a contract setting out the terms and conditions of how this would work.
Alternatively, you might want to set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree on how it should be managed.
In some circumstances, other options may work better than a business corporation. For example, you could form a business partnership. You might even decide to completely merge your two businesses.
To help you decide what form of joint venture is best for you, you should consider whether you want to be involved in managing it. You should also think about what might happen if the venture goes wrong and how much risk you are prepared to accept.
It's worth taking legal advice to help identify your best option. The way you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong. You need a clear legal agreement setting out how the joint venture will work and how any income will be shared
A Joint Venture Agreement should include:
- The parties involved
- The objectives of the joint venture
- Financial contributions you will each make whether you will transfer any assets or employees to the joint venture
- Intellectual property developed by the participants in the joint venture
- Day to day management of finances, responsibilities and processes to be followed.
- Dispute resolution, how any disagreements between the parties will be resolved
- How if necessary the joint venture can be terminated.
- The use of confidentiality or non-disclosure agreements is also recommended to protect the parties when disclosing sensitive commercial secrets or confidential information.
1. More resources: since two or more firms join together to form a joint venture, there is availability of increased capital and other resources.
2. Access to new markets: by engaging with a foreign collaborator, the products and services can be marketed in a foreign country.
3. New and improved Technology: One partner may have the new and improved technology but do not have the resources. Other partner may have resources like capital but do not have the technology. In such causes joint venture can fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign technology can be availed from its foreign collaborator.
4. Use of existing marketing arrangements or existing distribution network of one of the party is possible.
5. Access to improved resources like experienced technicians, experienced staff, greater capacity, financial resources etc. are possible through joint venture business.
6. Sharing of costs and risks with partners.
7. Diversification of business by producing new products or new area of business.
8. Increased productivity and greater profits.
9. Exchange of Products: Joint venture companies can offer their existing product to sell through the partners’ network and share the profit. Both Joint Venture partners can do the same. By exchanging products and services of the partner, they can diversify the product basket and sell it to their existing customers and increase the profit.
1. It takes time and efforts to form the right relationship.
2. The objectives of each partner may differ. The objectives needs to be clearly defined and communicated to everyone involved.
3. Imbalance in the share of capital, expertise, investment etc., may cause friction in between the partners.
4. Difference in the culture and style of business lead to poor co-operation.
5. Lack of assuming responsibility by the partners may lead the collapse of business.
6. Lack of communication between the partners may affect the business.