A Joint Venture (JV) is a cooperative enterprises entered into by two or more business entities for the purpose of a specific project or other business activity.
Often the joint venture creates a separate business entity, to which the owners contribute assets, have equity, and agree on how this entity may be managed. The new entity may be a corporation, limited liability company, or partnership.
In other cases, the individual entities retain their individuality and they operate under a joint venture agreement. In any case, the parties in the JV share in the management, profits, and losses, according to a joint venture agreement (contract).
Joint ventures are often entered into for a single purpose – a production or research activity. But they may also be formed for a continuing purpose.
Examples of Joint Ventures
Joint ventures can combine large and small companies on big and little projects. Here are some examples:
MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company to see all their beer brands in the U.S. and Puerto Rico.
In 2011, Ford and Toyota agreed to work together to develop hybrid trucks.
Mining and drilling are expensive propositions, and often two companies in these industries will combine as a joint venture to mine or drill in a particular area.
Forming a Joint Venture
All that’s needed to form a joint venture is a written agreement between the parties.
The agreement should spell out the details of the purpose, how the two (or more) parties share in profits and losses, and how the parties share in making decisions about the joint venture. A joint venture, even if it’s between two small businesses, should have at minimum this sort of written agreement.
What a Joint Venture is NOT
A joint venture may have some similarity to a partnership, but it’s not. A partnership is a single business entity formed by two or more people. A joint venture joins several different business entities (each of which may be any type of legal entity) into a new entity, which may or may not be a partnership. Partnership income taxes are paid by the owners individually.
Don’t confuse a JV with a ‘qualified joint venture,’ – a specific taxation form for husbands and wives in partnerships.
You may have heard the term “consortium” used to explain a joint venture.
A consortium is a looser arrangement between several different and distinct business entities. A consortium doesn’t create a new entity. In the travel industry, for example, a consortium of travel agencies allow memberships with benefits. The consortium negotiates on behalf of its members for special rates from hotels, resorts, and cruise lines.
What Are the Risks Involved?
Because strategic alliances are built on trust and convergent goals, one of the main risks you can face may occur if the partners are from different cultures. They may not trust operating a certain “way” or have divergent goals. Even with similar strategic goals, two partners who lack trust in each other may lack the willingness to reciprocate. When joint venturing, be prepared to give and take.
This sharing principle should govern the entire process. Many potential joint ventures, including large-scale projects, have died before the ink on the contract was dry, because of divergent goals and self-serving attitudes, which are not in sync with the essence of the joint venture. One example of this was the British Aerospace/Taiwan Aerospace alliance. After tough negotiations, the two parties signed an agreement during a celebrated ceremony in Taiwan. Soon after, Taiwan announced its wish to pull out of the deal. Why? Because their goals were divergent. Taiwan wanted to acquire new technology, which the British refused to give away, and the British wanted to capture new markets in Asia, which Taiwan refused to grant.
A joint venture concept is only effective when there is a true willingness to move forward together. Not even signed contracts have value if mutual trust and acceptance of the terms are not present. It is actually better not to consider a joint venture project if motives from either side are questioned by the other side. A graceful exit before any legal obligation takes effect will most likely prevent an inevitable failure. The risks involved are therefore simple to evaluate. You can:
- Waste your time
- Lose money
- Let go of important technology
- Gain nothing of significance in return
- Squander your credibility
Even though these and other risks in joint ventures are present, the rewards can far outweigh pitfalls. It is important to completely evaluate your risks, and do your homework before and during the process.