In research conducted by McKinsey & Company, it was clearly indicated that there is a rise in the number of joint ventures (JVs) across the globe. It also shows that executives reported they had a positive experience with joint ventures. In fact, more than 75% of these JVs met their expectations. It stands to reason that joint ventures represent a high chance of achieving set goals.
As a result, joint ventures are slowly but surely overshadowing alternatives like M&A (merger and acquisition), and are becoming the go-to strategy for business expansion and development. Joint ventures come with both risks and rewards for all parties involved, but to enjoy the latter, the first step is to be familiar with the different types of JVs, how partnerships are formed (and ended), and the legal paperwork that needs to support the process.
A joint venture refers to two or more businesses uniting their skills and resources to achieve the set goals. The reasons behind this endeavour vary from case to case but, most commonly, the focus is on:
DOCUMENT: Joint Venture Agreement
Regardless of the industry, the competition is harsh and no one’s success is guaranteed – while startups and SMBs struggle to build their name in the market, enterprises fight to keep their dominance. In recent years, joint ventures became a solid strategy to achieve business goals a company (of any size) sets.
Broadly speaking, a joint venture helps to increase the number of resources and capacity, boost expertise, and gain better access to established markets and distribution channels.
Poor communication between the parties forming the joint venture can have negative consequences. First off, goals need to be clearly defined – more often than not, the partners who form a JV have different objectives and don’t share them with each other, which affects the overall focus and can even lead to none of the goals being achieved.
Secondly, the imbalance of expertise or the number of resources brought about by the JV partners can affect the strength of the relationship and mutual respect.
In situations where the parties are from different cultures or have different management styles, the venture may suffer consequences due to poor cooperation and integration.
What is more, partners may not offer sufficient support or leadership skills and affinities, thus reducing the chances of the joint venture’s successful development.
Now that we’ve examined the negative possibilities, let’s look at the benefits that may come with forming a JV and the different types. Firstly, it is imperative to define the goals you wish to achieve with the venture. This will affect your decision on the type of venture you wish to establish:
There are several legal documents that can be easily drafted to define the goals, business structure, operation tactics, parties’ responsibilities, and general terms and conditions.
Before drafting an official venture agreement, the parties may decide to compose two additional documents:
The joint venture agreement is necessary to strengthen the bond between the parties and to secure their individual benefits.
It is not uncommon for joint venture partners to skip the most crucial step of the process – establishing the goals of the JV. Often parties may focus on their individual goals, which can ultimately do more damage than good. The two or more businesses involved in the venture should lay out the objectives and a clear-cut business plan which will act as a solid foundation for the upcoming endeavour.
If objectives are less complex and do not require additional expenses, a joint venture is established without setting up a new, separate entity – the parties simply agree to work towards an objective they have agreed on.
Alternatively, a separate entity can be established and all parties involved in the venture would own it. In this case, a decision has to be made regarding the type of venture – do you wish to form a corporation, a partnership, a limited partnership, or a limited liability company? The final choice will be made based on the complexity of the venture, the limitations, target markets, taxes, exit strategy, etc.
Joint ventures are subject to a number of regulatory issues, which is why the agreement should mention the following:
Joint ventures are formed among parties which see benefits from the symbiosis because each of the parties can contribute with a unique set of activities and resources other parties cannot provide. The agreement should specify how the individual parties involved in the joint venture are contributing – will they offer financial support, intellectual property (IP), real estate, services, or “know-how”? Each asset should be valued to avoid any potential issues down the road when the time comes to get paid out by the joint venture.
In the case when all parties are equal owners of the venture, it is essential to define governance. A multitude of variables intervene and some of the most important questions that need to be answered within the joint venture agreement are:
The joint venture partners need to agree on the specific means of financing, as well as the allocation of revenue. Funds are a delicate matter and should be discussed early on to avoid any future arguments that may result from misunderstanding.
One of the most important clauses of the agreement sets out the plan for how the venture will end or how one or more parties can exit. The following considerations need to be accounted for:
Above are some of the potential scenarios – since it is difficult to predict all possible situations, business professionals are advised to consult with their legal professional to cover as many bases as possible.
Choosing to participate in a new joint venture foundation will make significant changes to your business. Prior to making any final decision, be sure to review your business strategy, analyse the goals, evaluate your venture partners, and discuss the nature of the relationship and joint objectives.
Trust is the building block of any partnership, and in business – it needs to be cemented with a solid legal contract. It will enlist go-to solutions should any disagreements or issues arise. As such, it will keep all parties on the right track, working towards the same goals intended to maximise their business performance.