Joint Venture (JV)

What is a Joint Venture (JV)?

Joint Venture Definition JV

A Joint Venture (JV) is when two or more businesses collaborate on a business project, each taking a share of the profits, losses, and control. This creates a separate business entity, with the purpose of accomplishing a certain task by pooling the resources of the participating parties.

Each member has expertise in their field, and working together can be a strategic way to introduce a new product or service into a new industry. An example of this would be Fiat Chrysler and Google entering a partnership in 2016 to introduce autonomous vehicles. Google in this case brings its expertise in software development and artificial intelligence, and Fiat Chrysler brings its expertise in vehicle manufacturing and established production facilities.

 

 

Why Form A Joint Venture (JV)

Joint ventures are essentially just partnerships in the colloquial sense, however they can take the form of any legal structure. JV's can be corporations, limited liability companies (LLCs), or a general partnership. JV's are typically formed for the short-term purpose of research and development or production, they can also be formed for the long-term. Since the project is a separate legal entity and each partner has a stake in the business, they can also sell their portion of ownership to exit. After the entity has served its purpose, it can also be liquidated entirely, allowing for a simple exit strategy.

 

What To Do Before You Form A Joint Venture

These arrangements can take on multiple forms, and are dependent entirely on the purpose of the venture and what each party is trying to achieve. Regardless of the purpose and goals, and before you engage in anything, it's best to get legal advice to help inform your decision and ensure your best interests are protected. 

Discuss Profit, Loss, and Risk Sharing

It's important to discuss how profits are shared and eventually taxed, the more thorough and comprehensive the better as it avoids any lengthy legal battles in the future. Also clearly outline the responsibilities of each party and include how costs and other resources are split up. If forming a separate legal entity, clearly define the liability of each party. 

Define Clear Goals 

Identify the goals of the venture and ensure clear communication of goals and objectives with your business partner so each party is on the same page. Keep these goals realistic, unrealistic expectations are the thief of joy. It's also important to understand your own goals when entering into a new relationship. A smaller business may want the resources, distribution, and market share of the larger organization, while a larger organization may want to work with an innovative partner who has access to new products or ownership of intellectual property. Know what each party is getting out of the arrangement and that it is fair.

Choose a Good Partner 

Synergy is key when working in a team, it can be the difference between success and failure. Choosing a bad partner can lead to disputes in the future, lack of commitment, poor communication, and an ultimate waste of time and money. A good partner has resources, expertise, and a business culture that complements your own. This is of course easier said than done. A good place to start is by asking yourself the following questions:

  • Do they have a history of success?
  • Are they committed?
  • Are they open to collaboration, or better yet have a history of it?
  • Do you trust them?
  • What is their reputation?
  • Do you have common business objectives?
  • Do they have enough skin in the game?
  • Are there any potential conflicts of interest?

A company may tick every one of these boxes but that doesn't necessarily mean that they are a good partner either. You should also look at their business fundamentals. Here are some things you should probably check:

  • Are they financially stable?
  • Are they creditworthy?
  • Do they have sufficient financial resources?
  • Are they efficient in their main business operations?
  • What are their customer and supplier relationships like

These deals require extensive research, planning, and deliberation to assess the viability of the project. Conducting these basic checks can help you steer clear of poor partners and increase the probability of success.

 

Joint Venture Agreement Terms

This agreement (or co-venture agreement) is a legally binding agreement between two or more parties that agree to form a partnership. The purpose of this agreement is to outline the details of the venture and outline clear guidelines on how it will operate once running. 

A JV agreement should include:

  • Venture structure (LLC, corporation, non separate entity, etc)
  • Clear objectives
  • Initial and ongoing financial contributions of each member
  • Ownership of newly formed intellectual property 
  • Sharing of profits, losses, and risks
  • Management (responsibilities and business processes)
  • Dispute resolution guidelines
  • Exit Strategy (see bottom of page)

This agreement is a good starting point, however depending on the nature of the project, you may need to include non-compete clauses upon venture completion and non-disclosure agreements to protect the confidentiality of the venture.

 

What Are The Advantages of a Joint Venture (JV)

These deals are a great way to grow your business and expand into previously untapped areas. Forming a venture can help close the gaps in your own expertise and provide valuable insight from those with more experience. Here are some advantages:

Shared Capital

Forming a partnership allows for companies to share access to potentially scarce and highly specialized resources that they may not have had access to before. This isn't limited to just physical capital, but also applies to human capital and labour. Rather than going out and hiring industry experts, you can work directly beside them. 

JV's also allow companies to achieve economies of scale as they are able to achieve lower per-unit costs compared to individual production. Additionally, they are able to split marketing and labor costs.

Risk Sharing

If the project fails you do not have to bear the costs of a failed project on your own. Since you agree to share the costs and profits, you also share the risks associated with the project. This allows you to take on slightly more risky projects while having more defined risk.

Entry Into Foreign Markets

Cross-border ventures can allow for a company to expand into a new demographic more effectively by working alongside locals who have a deeper understanding of the target market. A poorly executed international expansion could permanently taint the brand's name in the foreign market and make re-expansion much more difficult. An example of a successful venture is one between Kellogg and Wilmar International Limited. Kellogg wanted to expand its presence in China and introduce cereal and snack foods. Through the venture they were able to leverage the existing market insight and distribution networks of their business partner for a successful and profitable entrance.

 

What Are The Disadvantages of a Joint Venture (JV)

JV's can be very advantageous when done right. However there are a lot of things that can go wrong. Some of the mistakes can be avoided before you engage in a venture through careful screening of potential partners. Here are some common disadvantages of JV's:

Unreliable Partners

Since the venture is made up of separate companies, it's possible that each company may not devote 100% of their resources to the success of the project. Additionally, delays or obstacles during the venture may result in partners putting in less effort in continuing.

Limit Outside Activity

Due to the nature of these partnerships, members may be required to sign exclusivity agreements or non-competes while the venture is in progress. This could affect its relations with vendors and other businesses. Before entering a venture you should understand these restrictions if you want to avoid any negative impacts on your business.

Unrealistic Objectives

Setting unrealistic or unclear objectives is just asking to set yourself up for failure and disappointment. To avoid this mistake, lots of research and planning is necessary before hand, which may be costly and time consuming. Setting clear objectives that are communicated to all involved is rarely the case.

 

Exit Strategy for a JV

After the partnership has achieved its goal, the exit strategy provides a clear path on how the newly formed entity will be dissolved. Lack of clearly written out exit procedures can result in lengthy and costly legal battles, financial loss, or potentially negative consequences for consumers. Common exit strategies include selling of the business, employee ownership, spinoff of operations, or liquidation.

 

Examples of Joint Ventures

There are countless examples of successful partnerships.  Below are some examples of larger and noteworthy deals in a variety of industries to give you a sense of how they work in the real world.

BMW and Brilliant Auto Group

In 2006, BMW formed one with Chinese auto manufacturer Brilliance Auto Group called "BMW Brilliance" and was formed with the goal of producing and selling BMW vehicles in China. This venture was formed out of Chinese regulation requiring that manufacturing operations be at least 50% Chinese owned. BMW and Brilliance Auto Group collectively invested €450 million, with BMW taking a 50% stake, Brilliance Auto taking a 40.5% stake, and the Shenyang municipal government taking the remaining 9.5%

The Walt Disney Company, News Corporation, NBC Universal, and Providence Equity Partners

These four media titans formed one in 2007 and created the streaming platform we now know as Hulu. The streaming service currently has almost 40 million subscribers and has proven to be a successful venture.

When the venture was formed, no party had majority control over the company, this naturally complicated things and caused confusion. As a result Disney bought out Fox's and Warner Media's share to become a majority stakeholder. Currently Comcast still owns 1/3rd of Hulu, however Disney has agreed to purchase Comcast's interest sometime after 2024 for no less than $27.5 billion.

Lockheed Martin and Boeing

Private Aerospace and Defense companies Lockheed Martin and Boeing formed one in 2006 after rising competition from SpaceX undercut their individual businesses of launch services for the government. 

The resulting partnership was a 50/50 joint venture to create a new company called United Launch Alliance (ULA). They have since launched over 100 satellites into orbit and even launched the Mars curiosity rover in 2012. 

ULA is now also a major competitor of SpaceX for government launches and both have continued to receive government contractors for missions and national security.

 

 

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