Joint Venture Advantages and Disadvantages
What is a Joint Venture?
Possibly your first question will be “What is a joint venture?” and then possibly “How is that different from a partnership?”. And yes, it is commonly referred to as a “JV”, but first question first.
A joint venture is an alliance between parties for mutual benefit. Still doesn’t really explain things, does it?
Where different companies that might not even be in the same industries see an opportunity to work together for mutual benefit without giving up any of their core business, that is a joint venture.
Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time. They allow each of the parties to leverage the resources, technology, finance or markets of other parties, for mutual benefit.
Property developments are often completed by joint ventures, where each party contributes different resources or expertise to complete the project. One party might have all the knowledge necessary to set up, manage and complete the project, another party might own the land and the third party might be a builder. By forming a joint venture, they all limit their risks to the areas where they have knowledge and experience and get to participate in a project that would otherwise be out of their league.
Telecommunications companies might form joint ventures to construct and use infrastructure that is costly to build and maintain and would otherwise be underutilised. They each gain access to a necessary resource, but at a reduced cost.
Its also common for joint ventures to form between foreign companies wanting to break into a new market where there is an allied provider who already has their customers in that territory. Consider a home and contents insurance company that teams up with a car insurance provider in a market where they don’t currently have a foothold, being able to increase the variety of insurance products offered to the car insurer’s customer base.
Joint ventures can involve more than two parties and can involve different types of entities, such as a mix of individuals, companies and trusts. There is no specific formula. Some joint ventures are formed by contract and some are formed as companies where each joint venture party owns shares. An incorporated joint venture is more likely to become a saleable asset in the future than an unincorporated joint venture.
Famous Joint Ventures You Might Not Have Heard About
Some recent international joint ventures include the following:
Haven – This health care focused joint venture was formed in 2018 between Amazon, Berkshire Hathaway and JPMorgan Chase. Think about the benefits each party might be contributing to the venture. Amazon has amassed huge amounts of data on consumer spending and is increasing its data collection into our homes with Alexa and Amazon Prime. Berkshire Hathaway has been around for 180 years accumulating incredible knowledge and experience in operating successful businesses and understanding market changes. JPMorgan Chase is an investment bank. The stated goal of Havel is to simplify insurance benefits, improve healthcare services and reduce the cost of health care services and prescription drugs.
Self-driving cars – Google’s Waymo self-driving division has joint ventured with Jaguar Land Rover and Chrysler rather than building cars themselves and the car manufacturer doesn’t have to start its self-drive tech from scratch. Volvo and Uber, Honda and General Motors’ Cruise Unit and most recently, Hyundai and Aptiv have teamed up, all for similar reasons. Predictions are that the motor vehicle industry will be dominated by tech companies in the not too distant future.
Cosmotec – is a joint venture between the Sumitomo Corporation Group and a Brazilian based cosmetics company, with a view to gaining access to one of the world’s largest cosmetics markets.
Joint Venture Examples
For small business we see a lot of joint ventures where parties collaborate to develop a product or service they couldn’t offer on their own. Some very common joint ventures include collaborations between:
- software developer + industry expert
- web or app developer + industry expert
- digital marketers + tradies
- digital marketers + professional services
- digital marketers + any business that needs leads
- salesperson + any business that needs to convert leads
- professional onboarding or training + any business with a high demand for bringing on new staff
- international company + local distributor
- industry expert + allied industry expert
- property owner + property developer
- financier + any business needing capital
We’ve already talked about some joint venture examples, so perhaps we should also look at the characteristics of a joint venture, or examples of the kind of provisions you’d expect to see covered in a joint venture agreement.
- there is usually a joint venture agreement setting out each party’s rights and obligations, as well as what will happen to any venture assets at the end of the project
- the proportionate interests of the parties are described in the joint venture agreement, sometimes 50/50 and sometimes a different proportion
- the joint venture agreement should set out how decisions will be made and any deadlocks broken and also provide for prompt dispute resolution to avoid holding up the project
- each party has a proportionate interest in the revenue or profits of the joint venture, but that may be different from their level of authority in decision making – investment partners are sometimes silent partners to a joint venture, meaning they don’t have a say in how the project is conducted
- each party to a joint venture continues to control and operate their own business independently to the project
- transactions may be recorded separately by the parties involved and invoiced back to the venture, or accounts will be maintained so that each of the joint venture parties can separately account for their contributions and any distributions they receive
- what happens to the assets of the venture, particularly intellectual property when the project ends?
- are the parties restrained from competing with the joint venture for a period?
What is the Difference Between a Joint Venture and a Partnership
Partnerships are generally long-term whole of business ventures whereas joint ventures are often project specific side gigs. In a partnership you also agree to take full responsibility for the partnership liabilities, whether you created them or not, and even if you didn’t know they were created by one of the other partners.
We generally discourage people from calling a party a joint venture partner or calling their venture a joint venture partnership. In fact, we prefer joint venture and partnership not to be mentioned in relation to the same project.
Some comparisons between a joint venture vs partnership
- separate legal entity
- whole of business
- long term business
- joint and several liability
- responsible for actions of other parties
- change in partner requires new partnership
- only separate legal entity if incorporated
- side gig
- project or goal specific
- several liability only
- not responsible for actions of other parties
- joint venture parties can enter and exit without affecting the setup of the venture
Benefits of a Joint Venture
The benefits to a party in a joint venture will depend upon their goal in entering the arrangement in the first place. Some common benefits of joint ventures include:
- business diversification
- entry into new markets
- new distribution channels
- leverage expertise of another party
- limited scope
- defined risks
- defined rewards
- potential to create saleable asset
- reduced costs
- economy of scale
- strategic information sharing
Risks of a Joint Venture
One of the scariest parts of going into a joint venture for small business owners is that the other party won’t be as committed to the project as you are, and you end up doing everything yourself. We’ve seen it happen.
One of our digital marketing clients stopped joint venturing when they realised that they were doing everything for the venture and the other party was sitting back and doing nothing. Our client had the team and the methodology and the impatience to get things moving, but each joint venture became a project where they should have simply been paid for their digital marketing services and ended the relationship after delivery. While we were able to exit them from all agreements without too much fall out, it put their business back 12 months and impacted their revenue goals.
Your main risks are the same as any business venture, loss of time, loss of money, loss of trade secrets or other intellectual property, loss of staff and reputational risk. Weigh up the benefits against the risks, mitigate your risks and consider your options.