One of the most powerful tools in today’s competitive business world is a Joint Venture which essentially is a situation where two or more business entity’s team up for the purpose of expanding business influence and creating a more powerful market presence. They are usually short term business arrangements where parties share responsibility but retain their separate legal identities.
Joint ventures (JV) remain an excellent way to boost profits with minimal up-front cost to the business owner. It normally involves a sharing of resources, which could include capital, personnel, physical equipment, facilities or intellectual property such as patents. Some famous examples include Sony- Ericsson, Exxon-Mobil, Nokia- Siemens, Cadbury-Schweppes etc.
REASONS TO CONSIDER A JV
- Risk Sharing – Risk sharing is a common reason to form a JV, particularly, in highly capital intensive industries.A joint venture provides a company with a way to exit from a business or to enter a new business with less of a financial commitment than if it were to do this on its own.
- Market Access – Creating new distribution channels can be extremely difficult, time consuming and expensive, therefore forming a JV with the right partner who can provide instant access to established, efficient and effective distribution channels might be a wise option.
- Geographical Constraints – To explore opportunities in a foreign market, partnering with a local company would be attractive to a foreign company.
- Expertise – It is fairly common for different companies to submit a joint bid for the acquisition of another company or the execution of a project. Whilst one of the joint venturers may possess the necessary technical expertise, the other party might have a formidable marketing and sales infrastructure which ultimately increases the strength of the venture.
STRUCTURING A JV
The structure of a joint venture can have a huge impact on its success. Typically a JV is created through the process of incorporating a new company with the joint-venturers as shareholders. The entity then conducts the business of the joint venture, concludes contracts and is liable if things go wrong. To further regulate the relationship of the parties it is also germane to have a Joint Venture Agreement and a Shareholders agreement.
From the outset, potential partners should set out the terms and conditions in these agreements as this will help prevent any misunderstanding once the joint venture is up and running.
A Joint Venture Agreement should cover:
- The structure of the joint venture, e.g. whether there will be a special purpose vehicle (SPV) to warehouse the venture.
- The objectives of the Joint Venture.
- Financial contributions expected from each party.
- Duration of the Joint Venture
- Whether you will transfer any assets or employees to the joint venture
- Ownership of intellectual property created by the joint venture
- Management and control
- How liabilities, profits and losses are shared
- Dispute Resolution
- Exit Strategy
Joint Ventures are used by small, medium and large scale businesses to increase sales, gain access to wider markets, and enhance technological capabilities. It is however essential to ensure that the framework is clearly understood and documented to avoid disputes.