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.
Your business may have strong potential for growth, and you may have innovative ideas and products. However, a joint venture could give you:
- more resources
- greater capacity
- increased technical expertise
- access to established markets and distribution channels
Types of Joint Venture
How you set up a joint venture depends on what you are trying to achieve.
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.
The Risks of Joint Ventures
Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:
- the objectives of the venture are not 100 per cent clear and communicated to everyone involved
- the partners have different objectives for the joint venture
- there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
- different cultures and management styles result in poor integration and cooperation
- the partners don’t provide sufficient leadership and support in the early stages
Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.
Assess Your Readiness for a Joint Venture
Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy.
It’s important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. In fact, you might decide that there are better ways to achieve your business aims.
You may also want to look at what other businesses are doing, particularly those that operate in similar markets to yours. Seeing how they use joint ventures could help you choose the best approach for your business. At the same time, you could try to identify the skills they apply to partner successfully.
You can benefit from examining your own business. Be realistic about your strengths and weaknesses – consider performing a SWOT (strengths, weaknesses, opportunities and threats) analysis to discover whether the two businesses are a good fit. You will almost certainly want to find a joint venture partner that complements your own business’ strengths and weaknesses.
You should consider your employees’ attitudes and bear in mind that people can feel threatened by a joint venture. It can also be difficult to build effective working relationships if your partner has a different way of doing things.
If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits. Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able to use your joint venture partner’s customer database to market your product or offer your partner’s services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.
Plan Your Joint Venture Relationship
Before starting a joint venture, the parties involved need to understand what they each want from the relationship.
Smaller businesses often want to access a larger partner’s resources, such as a strong distribution network, specialist employees and financial resources. The larger business might benefit from working with a more flexible, innovative partner, or simply from access to new products or intellectual property.
Similarly, you might decide to build a stronger relationship with a supplier. You might benefit from their knowledge of new technologies and get a better quality of service. The supplier’s aim might be to strengthen their business from a guaranteed volume of sales to you.
Whatever your aims, the arrangement needs to be fair to both parties. Any deal should:
- recognize what you each contribute
- ensure that you both understand what the agreement is expected to achieve
- set realistic expectations and allow success to be measured
The objectives on which you agree should be turned into a working relationship that encourages teamwork and trust.
Choosing the Right Joint Venture Partner
The ideal partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture must work contractually, but there should also be a good fit between the cultures of the two organizations.
A good starting place is to assess the suitability of existing customers and suppliers with whom you already have a long-term relationship. You could also think about your competitors or other professional associates. Broadly, you need to consider the following:
- How well do they perform?
- What is their attitude to collaboration, and do they share your level of commitment?
- Do you share the same business objectives?
- Can you trust them?
- Do their brand values complement yours?
- What kind of reputation do they have?
If you opt to assess a new potential partner, you need to carry out some basic checks:
- Are they financially secure?
- Do they have any credit problems?
- Do they already have joint venture partnerships with other businesses?
- What kind of management team do they have in place?
- How are they performing in terms of production, marketing and personnel?
- What do their customers and suppliers say about their trustworthiness and reputation?
Before you consider signing up to a joint venture, it’s important to protect your own interests. This should include drawing up legal documents to protect your own trade secrets and finding out whether your potential partner holds intellectual property rights agreements.
Also, it’s worth checking to see whether they have other agreements in place, either with their employees or consultants.
Create a Joint Venture Agreement
When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevent any misunderstandings once the joint venture is up and running.
A written agreement should cover:
- the structure of the joint venture, e.g. whether it will be a separate business in its own right
- the objectives of the joint venture
- the financial contributions you will each make
- whether you will transfer any assets or employees to the joint venture
- ownership of intellectual property created by the joint venture
- management and control, e.g. respective responsibilities and processes to be followed
- how liabilities, profits and losses are shared
- how any disputes between the partners will be resolved
- an exit strategy – see the page in this guide on ending a joint venture
You may also need other agreements, such as a confidentiality agreement to protect any commercial secrets you disclose.
It is essential to get independent expert legal advice before any final decisions are taken.
Make Your Joint Venture Relationship Work
A clear agreement is an essential part of building a good relationship. Consider these ideas:
- Get your relationship off to a good start. For example, you might include a project that you know will be a success so that the team working on the joint venture can start well, even if you could have completed it on your own.
- Communication is a key part of building the relationship. It’s usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture.
- Sharing information openly, particularly on financial matters, also helps avoid partners becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work.
- It’s essential that everyone knows what you are trying to achieve and works towards the same goals. Establishing clear performance indicators lets you measure performance and can give you early warning of potential problems.
- At the same time, you should aim for a flexible relationship. Regularly review how you could improve the way things work and whether you should change your objectives.
- Even in the best relationship, you’ll almost certainly have problems from time to time.
Approach any disagreement positively, looking for “win-win” solutions rather than trying to score points off each other. Your original joint venture agreement should set out agreed dispute resolution procedures in case you are unable to resolve your differences yourselves.
For more information, see the page in this guide on how to create a joint venture agreement.
Ending a Joint Venture
Your business, your partner’s business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but sooner or later most partnering arrangements come to an end. If your joint venture was set up to handle a particular project, it will naturally come to an end when the project is finished.
Ending a joint venture is always easiest if you have addressed the key issues in advance. A contractual joint venture, such as a distribution agreement, can include termination conditions. For example, you might each be allowed to give three months’ notice to end the agreement. Alternatively, if you have set up a joint venture company, one option can be for one partner to buy the other out. The original agreement may typically require one partner to buy out the other.
The original agreement should also set out what will happen when the joint venture comes to an end. For example:
- how shared intellectual property will be unbundled
- how confidential information will continue to be protected
- who will be entitled to any future income arising from the joint venture’s activities
- who will be responsible for any continuing liabilities, e.g. debts and guarantees given to customers
Even with a well-planned agreement, there are still likely to be issues to resolve. For example, you might need to agree who will continue to deal with a particular customer. Good planning and a positive approach to negotiation will help you arrange a friendly separation. This improves the chances that you can continue to trust each other and work together afterwards. It can also raise your profile in the business community as a reliable and productive partner.