What is a Joint Venture?
A joint venture is an arrangement between two or more individuals or companies to work towards a mutual business goal or project. The parties may choose to remain as separate entities or form a new business entity.
Each party agrees to contribute the resources necessary to achieve the desired outcome, such as expertise, personnel, capital, and patents. The parties also must come to an agreement about the objectives of their arrangement, as well as other key considerations such as how profits, losses, and liabilities will be shared.
Advantages of joint ventures
Individuals and companies enter into joint ventures to take advantage of the wide range of potential benefits they offer. According to Deloitte, the most frequently observed drivers for joint ventures are:
- Access to resources
- Additional funds
- Intellectual property
- New capabilities
- Access to markets
- Risk mitigation
Disadvantages of joint ventures
Joint ventures also have a number of potential disadvantages. It’s worth keeping in mind that an estimated 60% to 70% of all joint ventures fail. Anyone considering entering into this type of business arrangement should familiarize themselves with the risks involved. They include:
- Extensive planning is often necessary
- The need to contribute significant resources
- Equal involvement from all parties is difficult to truly achieve
- The possibility of conflict between parties
- The joint venture may restrict other business opportunities
- Possible clashes in management styles
- Exiting the joint venture may be difficult
How to enter into a joint venture
As long as all parties agree to the terms, a joint venture can be executed in an informal or formal manner.
An informal arrangement typically involves a handshake deal, whereby the parties involved make a verbal agreement to work together. Before entering into a joint venture in this way, it’s a good idea to weigh up the pros and cons of such a business deal.
Formal agreements can be made by drawing up a legal contract known as a joint venture agreement. A joint venture agreement allows parties to clearly set out the terms of their partnership in a legally-binding document.
Key terms in a joint venture
Similar to any other business arrangement, it’s important to establish the terms by which the parties intend to establish the joint venture. Doing so will help ensure that all parties are on the same page about their respective rights and responsibilities in the joint venture. It will also help to make the arrangement legally enforceable.
At minimum, a joint venture agreement should include the following key terms:
- The purpose of the joint venture
- The parties involved and how they will be structured
- Each party's percentage of ownership
- The resources that each party will contribute
- The duties of each party
- How the joint venture will be formed (including any relevant state laws governing it)
- The bank account the joint venture will use
- How banking matters will be handled
- How profits will be distributed
- How losses, liabilities, and conflict will be dealt with
- How long the joint venture will be for (i.e., for a limited time or indefinitely)
When considering entering into this cooperative arrangement, it’s also vital to be cognizant of the tax implications involved.
Joint ventures vs. M&As
Joint ventures are often compared to M&A deals. However, they have several critical differences. For example, M&A deals have an indefinite time horizon, while joint ventures usually have a clearly defined and limited duration. Joint ventures typically conclude when the goal has been achieved.
The goals of the partnership, the costs involved, and the level of control that can be yielded by each party are other points of distinction to be mindful of.
Examples of well-known joint ventures
There is no shortage of examples of joint ventures. One of the most well-known is Sony Ericsson, a joint venture between Japanese electronics giant, Sony Corporation, and Swedish telecommunications company, Ericsson, in 2001. The joint venture’s objective was to create more advanced cell phones. This example is by and large considered to be one of the most successful joint ventures in recent times, culminating in Sony buying out Ericsson.
The joint venture between Volvo Cars and Uber is also considered an example of a successful joint venture. The two companies entered into a joint engineering agreement in 2016 and jointly developed the production of a self-driving car, which Uber plans to deploy in the near future.
Another oft-cited example is the joint venture between Starbucks Corporation and Barnes & Noble. It involved the iconic coffee chain setting up shop in Barnes & Noble bookstores. Despite some difficulties, both parties benefited from the arrangement by playing on each other’s strengths.
For an example of a failed joint venture, it’s hard to look past the one between luxury jewelry company, Tiffany & Co, and famed watch retailer, Swatch Group. The arrangement went so sour that Tiffany & Co was ordered to pay Swatch Group $448M. Haven, the joint venture by Amazon, Berkshire Hathaway, and JPMorgan Chase, is yet another example of a failed joint venture.
Key characteristics of successful joint ventures
As the examples above show, not all joint ventures pan out. While a number of factors impact the success or failure of a joint venture, there are several characteristics that successful joint ventures share. They include:
- Setting out clear, mutual goals
- The parties involved are ideal partners
- Continually monitoring for changing conditions.
- Being adaptable to changes.
- Establishing how to handle disputes and clear exit strategies early on
Joint ventures are a type of business partnership that individuals and businesses enter into in order to leverage potential benefits including access to new resources and markets. While there are many examples of successful joint ventures, most fail. As such, it’s crucial to carefully consider the risks associated with this business arrangement before entering into one.