What is a joint venture in business?
A joint venture is a unique and powerful tool in business.
Specifically, it allows two or more companies to pool their resources and expertise to achieve a common goal.
Consequently, your business will gain new products, services, and markets that would not have been possible if you were operating alone.
Whether you are an entrepreneur looking to expand your business or a CEO seeking to diversify your portfolio, you need to understand what a joint venture is and how it works.
In this article, you will discover the basics of a joint venture, such as its definition, benefits, potential challenges, and so on.
So, if you are ready to learn more about one of the most versatile tools in the business world, let’s dive into the world of joint ventures.
What Is Joint Venture? – What Is Joint Venture in Business
A joint venture is a business arrangement in which two or more parties work on a specific project or achieve a common goal.
It is a form of collaboration where each company contributes resources, such as capital, human resources, and expertise, to the joint venture.
The joint venture is typically set up as a separate legal entity and is governed by a written agreement outlining the partnership’s terms and conditions.
This includes the distribution of profits and responsibilities.
Types of Joint Venture – What Is Joint Venture in Business
Joint ventures can take many forms, depending on the cooperation form, industry, and spatial dimension.
Joint Ventures Classified Under Cooperation Forms
There are two types of joint ventures classified under cooperation forms, and they are:
Equity Joint Venture – What Is Joint Venture in Business
An equity joint venture (EJV) is one in which participating companies pool their resources and expertise to establish a new, separate legal entity.
Each company contributes capital and shares in the profits and losses of the joint venture.
Equity joint ventures (EJV) often have a separate limited liability company (LLC) as their business structure.
This protects the different partners from liability.
In this form of a joint venture, the participating companies’ losses and gains depend on their equity ownership percentage.
EJV’s purposes are to diversify risks, increase capital raising chances and opportunities, and reduce obstacles to entering new markets.
All of these are meant to happen while the EJV exists.
Lastly, this form of joint venture allows small companies to join forces and create larger companies without merging.
Contractual Joint Venture
This is a joint venture in which participating companies collaborate on a project.
However, they get to maintain their independence and retain control over their respective businesses.
Specifically, the relationship between the companies is governed by a contract outlining the partnership’s terms and conditions.
Unfortunately, it’s not a relationship recognized by law.
Additionally, it does not have a legal entity that separates its participating companies from the business.
As a result, the participating companies get to decide their role in the relationship and their different roles in achieving the goal they came together for.
Joints Ventures Classified By Industry – What Is Joint Venture in Business
Joint ventures are also distinguished based on industry, and the following are the variants under it:
Horizontal Joint Venture
This is a joint venture where companies from the same industry or sector come together to form a joint venture for a specific project or opportunity.
The partners in a horizontal joint venture typically have similar skills, resources, and expertise, which can help the joint venture to achieve its goals more effectively.
So, rather than keep competing with each other, they come together and create outputs that they can sell to their clients and customers.
They also sell to their competitor’s customers.
As great as this joint venture is, it is often very cumbersome to manage, which can bring about disputes among the participating companies.
The profits and losses made from the alliance are either shared equally or based on their agreement.
Vertical Joint Ventures – What Is Joint Venture in Business
This venture is where two or more companies from different supply chain stages come together to form a joint venture.
The partners in a vertical joint venture typically have complementary skills, resources, and expertise, which can help the joint venture to achieve its goals more effectively.
An example of this collaboration is one between chocolate manufacturers and cocoa producers.
In this type of joint venture, the companies involved and their customers benefit, but not all parties benefit.
Furthermore, vertical joint ventures are usually created between retailers and producers or suppliers and producers.
You should know that vertical joint ventures can also be complex and challenging to manage, given the different perspectives and goals of the partners involved.
So, you need to have a clear and well-drafted joint venture agreement that outlines the roles and responsibilities of each partner.
Also include the terms and conditions that will govern the relationship.
Concentric Joint Ventures
This type of joint venture is where two or more companies from the same sector come together to form a joint venture.
In other words, the participating companies operate in related or similar industries.
The partners typically have complementary skills, resources, and expertise, which can help the joint venture to achieve its goals more effectively.
An example of this collaboration is one between motorbike manufacturers and car producers.
This joint venture benefits and exposes the parties to a different market.
It also allows them to find and attract customers interested in their company’s product.
Conglomerate Joint Ventures – What Is Joint Venture in Business
This is a type of joint venture where two or more companies from different industries or sectors come together to form a joint venture.
The partners in a conglomerate joint venture often bring different skills, resources, and expertise to achieve their goals more effectively.
Conglomerate joint ventures can be an effective way for companies to collaborate and pursue new business opportunities.
However, you should consider the risks and benefits before entering a conglomerate joint venture.
Joint Ventures Classified Under Spatial Dimension
The following are the two variants of joint ventures classified under spatial dimension:
Domestic Joint Venture
A domestic joint venture is one where two or more companies come together to jointly undertake a specific project or activity within the same country.
In this arrangement, the participating companies pool their financial, technological, and human capital resources to achieve a common goal.
Domestic joint ventures can take various forms, such as a general, limited, or corporation partnership.
Also, they are governed by the laws and regulations of the country in which they are based.
International Joint Venture – What Is Joint Venture in Business
An international joint venture is a joint where two or more companies from different countries jointly undertake a specific project.
In this arrangement, the participating companies pool their financial, technological, and human capital resources to achieve a common goal.
International joint ventures can take various forms, such as a general partnership, limited partnership, or corporation.
Additionally, they are governed by the laws and regulations of the countries involved.
Features of Joint Ventures – What Is Joint Venture in Business
Joint ventures are of different types and are classified differently.
However, they all have the same features that portray them as a joint venture.
And these features are:
Parties
In every joint venture, there are parties involved referred to as co-venturer.
Any business alliance that doesn’t have up to two or more parties involved is not a joint venture.
Duration – What Is Joint Venture in Business
A joint venture has duration for how long it last.
It is mostly short-termed as the parties involved come together to achieve goals or overcome given issues.
So, the association is often temporary and ends when it reaches its purpose.
However, some are set for the long term.
Agreement
Every joint venture has a written agreement signed by the parties involved.
The agreement will stipulate that the participating companies will assist each other.
It will also contain other details and terms such as liabilities, duration, etc.
Shared Resources – What Is Joint Venture in Business
In a joint venture, all party is to share their human and physical assets in moving the goals and projects ahead.
This works to benefit all parties involved as they all carry the financial responsibility.
Sharing of Profits and Risks
An important feature of joint ventures in business is the sharing of profits and risks.
Every business comes with risks.
Indulging in another venture with another business does not lessen your risk but increases it.
However, you don’t get to bear the risk or enjoy the profits of a joint venture alone.
And that’s the beauty of a joint venture.
Benefits of Joint Venture – What Is Joint Venture in Business
A joint venture’s main objective is to combine each participating company’s strengths to achieve a mutually beneficial outcome.
This can result in the following:
Increased Market Reach
Joint ventures can help companies to enter new markets and reach a wider audience.
For example, if you form a joint venture with a company based in a different country, you will likely gain access to new customers and markets.
Sharing of Resources – What Is Joint Venture in Business
Joint ventures allow participating companies to pool resources, such as capital, human resources, and expertise, to achieve common goals.
This can then lead to cost savings and improved efficiency.
Improved Competitiveness
What’s more?
Joint ventures can help to increase a company’s competitiveness by providing access to new technologies, products, and services.
For example, your company can form a joint venture with another company to gain access to new technologies or to expand your product portfolio.
When you do, you will have a competitive edge against the competitors.
Access to Complementary Expertise – What Is Joint Venture in Business
Joint ventures can provide participating companies access to new skills and knowledge, allowing them to expand their capabilities.
Thus improving their overall competitiveness.
For example, your company can form a joint venture with another company to gain access to new expertise or to improve its operational efficiency.
Reduced Risks
Joint ventures can reduce the financial and operational risks associated with a project or venture by sharing costs and responsibilities among partners.
For example, your company can form a joint venture with another company to share the risks associated with a new product launch or market entry.
Improved Innovation – What Is Joint Venture in Business
Furthermore, joint ventures can facilitate the development of new products, services, and technologies by sharing research and development efforts.
For example, your company can form a joint venture with another company to develop new technologies or collaborate on research projects.
Potential Challenges of Joint Ventures – What Is Joint Venture in Business
While joint ventures can offer many benefits, they can also come with various potential challenges that should be carefully managed.
Some of the most common challenges of joint ventures include the following:
Integration Issues
Integrating two or more companies can be difficult and time-consuming.
Also, it can be challenging to establish effective communication and collaboration between partners.
Loss of Control
Participating in a joint venture means that you will share control over key decisions and operations.
This will be difficult for your company if it is used to having complete control over its operations.
Management Difficulties – What Is Joint Venture in Business
Joint ventures can be complex to manage, especially if the partners are from different countries or have different corporate cultures.
It can be difficult to reconcile participating companies’ different business practices and management styles.
Risk of Financial Losses
Joint ventures involve sharing the risks and benefits of a venture.
Partners may be exposed to significant financial losses if the joint venture is unsuccessful.
Challenges with Intellectual Property – What Is Joint Venture in Business
When forming a joint venture, you may have to share sensitive information, trade secrets, and proprietary technologies.
This, as a result, can lead to concerns over intellectual property protection and confidentiality.
Legal and Regulatory Compliance
Joint ventures can be subject to complex legal and regulatory requirements, including anti-competition laws and cross-border regulations.
When you form a joint venture, you and your partners need to ensure that the joint venture complies with all applicable laws and regulations.
Disagreements on Decision-making – What Is Joint Venture in Business
Joint ventures require a high degree of collaboration and cooperation between partners for the joint venture to work and succeed.
However, disagreements in decision-making can arise when partners have different opinions or interests.
How to Set Up a Joint Venture – What Is Joint Venture in Business
A joint venture is quite beneficial for businesses.
You get to achieve your goals with the help of other businesses while maintaining your business identity.
However, to enjoy the benefits of joint ventures, you need to work effectively and carefully set it up.
The following steps will help you to do this.
Select Your Partner
The first action to take when setting up a joint venture is choosing your partner.
Knowing your business objective will help you seek and identify co-venturers that will complement your business.
It will also help accomplish your business goals.
For example, your company developed a new product but lacked the resources to advertise and market the product.
You can seek a company with a good marketing capacity or market presence to promote, distribute, and sell your product jointly.
When you have identified the companies that will match your business goals, you will need to check if they are good fits with your company.
Overall, for any joint venture to be successful, all the parties involved should work productively together.
Choose the Joint Venture Type You Want – What Is Joint Venture in Business
You can establish a joint venture in two different ways or arrangements.
First, you have an equity joint venture, where you create a new separate legal entity to serve as the joint venture business.
With an equity joint venture, all the parties involved will own interest.
The second alternative is establishing a joint venture under a contractual relationship.
With this alternative, the parties involved will sign a contract that states the relationship terms.
This is the less expensive choice.
However, before choosing any, you need to ensure that you consider the following:
- First, consider whether or not you want liability protection.
- Secondly, know how much are you prepared to spend to establish the joint venture.
- Thirdly, check your projected business venture complexity.
If your venture is small, spending more on creating a new legal entity is not advisable.
However, if you are concerned about liability, you might need protection by operating as a limited liability company or corporation.
Create the Agreement
After deciding on the type of joint venture, you should start drafting the basics of your projected arrangement.
You need to be careful when doing this, as joint venture agreements are often lengthy and complicated.
The important people you will need to run your agreement by and deal with are a lawyer and an accountant.
They will work with you in deciding how the losses and profits will be shared, the governance and formation structure, and the contribution of each party.
Additionally, they will work with you to define the venture’s commercial arrangements, tax treatment, and plans for the participating party.
However, the other party will need to agree to these terms as they will define the venture’s scope and the type of operations and activities it will be engaging in.
Also, when going through this process, consider forming a team that will be assigned the responsibility of dealing with any issues that might arise and executing the deal.
Conclusion on What Is Joint Venture in Business
This wraps up our discussion on what is a joint venture in business.
A joint venture in business refers to a strategic partnership between two or more entities with a shared goal of achieving a specific objective.
This collaboration allows companies to pool their resources, skills, and expertise to achieve a common goal that is usually beyond their reach when they work alone.
Certainly, joint ventures can be a cost-effective way to enter new markets, access new technologies, and share the risks and rewards of a project.
Nevertheless, before entering a joint venture, you should consider the potential benefits and drawbacks and establish clear goals and responsibilities.
With the right planning, communication, and execution, joint ventures can be a powerful tool for growth and success in the business world.
