What is a joint venture?
Everything you need to know about joint ventures
Whether you own a multi-million dollar business or are a small business owner, you’ve likely considered pursuing a joint venture, given the financial gains such a partnership has the potential to generate. Among the many advantages and benefits of a joint venture agreement is that they allow participants to pool resources, thus maximizing profits with minimal or no new investment.
Take the time to understand this type of business relationship and study some joint venture examples. You’ll find the clarity you need to make strategic business decisions for your company’s long-term health.
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What is a joint venture?
The classic definition of a joint venture is a business arrangement in which two or more companies combine resources on a project or service. The length of the agreement and what resources it will include will vary. Participant companies typically agree to split any profits the venture creates. As a result, joint ventures are potentially advantageous for companies in need of expanded resources with minimal (or no) infusion of capital.
The key to any joint venture is trust. You’ll be working with unknown entities from different companies, and in order to accomplish your shared goals you’ll need to trust them. Trust must be earned, though. You will be working closely with these individuals for what could be a lengthy amount of time. Are they the sort who might betray you? You’ll need to do your homework when the prospect of a partnership first arises and decide whether or not they deserve your trust.
What a joint venture isn’t
A joint venture is not a partnership, though they do share some characteristics. The main difference between a partnership and a joint venture is that a joint venture is limited to one particular venture while a partnership is not.
Joint ventures are also formed for a specific amount of time while partnerships are usually built for the long term. Partnerships in the U.S. fall under the laws of their state, usually within contract law.
What is involved in a joint venture agreement?
Those who enter into a joint venture need a contract that spells out the parameters of their involvement. This joint venture agreement describes the purpose of the arrangement and sets up everything both parties need to start their shared venture. This includes profit and loss details, ownership allocations and a termination clause. Other parts of the agreement can include how the venture is staffed and structured, the scope of the venture and what determines the success of the venture.
How do taxes work in a joint venture?
Unlike a partnership, a joint venture is not recognized as a taxing entity by the IRS. Instead, the joint venture agreement determines how taxes will be paid. If the venture operates as a separate business entity, it will pay income taxes just like any other type of business. In the agreement, the parties involved specify how they will split profits and losses and how they will pay any taxes that are due.
Types of joint ventures
There are two major types of joint venture that two or more companies might participate in. These joint ventures might affect one particular product or an entire product or service line.
1. Personnel-based joint venture
This type of partnership covers both the people themselves and the expertise they bring to the table. Several staff members from Companies A and B are placed on a project. Think multiple programmers to design or upgrade an app, or several architects to refurbish an out-of-date building.
2. Equipment-based joint venture
This type of venture involves technology or machinery. For example, Company A lacks the manufacturing technology to produce its new furniture line. It partners with Company B, which has the necessary equipment but lacks designers. The advantages of a joint venture agreement in this example are clear: the collaboration allows Company A to create its desired innovation without an outlay of capital, while Company B gains a percentage of profits without incurring development costs.
Advantages of joint ventures
The benefits of this type of business relationship center on the acquisition of (shared) resources without an (excessive) outlay of capital. This sharing of resources facilitates companies’ expansion into new markets, allowing for relatively low-risk, scalable business growth.
Joint ventures are also highly flexible. Those who participate don’t need to form a new business entity to create the venture’s collaborative product. The partners are also not bound to one another after the expiration of the initial partnership contract; each business retains its unique identity and autonomy, and each may carry on business activities unrelated to the joint venture. As such, joint venture arrangements streamline the process of business innovation while minimizing its risks.
Disadvantages of joint ventures
Engaging in a joint venture may limit your opportunities to interact with other organizations, particularly if your contract contains non-competition or non-disclosure clauses or limits the use of non-specified vendors. This can end up stifling the constant innovation your company needs to continue producing value and creating the ultimate customer experience.
Joint venture participants may face increased liability. While most businesses entering joint venture agreements are limited liability companies (small businesses), each participant is equally responsible for legal claims arising from the joint venture, regardless of its level of involvement (or profit) from the venture. Depending on the terms of the joint venture contract, you and your partners may contribute resources unevenly. This can lead to problems if the profit-sharing arrangement doesn’t adequately compensate one side or the other.
Additionally, if you don’t choose your partners carefully you run the risk of dragging down the quality of your own company. Teaming up with people who don’t share your company’s core values can negatively impact the way your business operates and lead to trouble with the products you produce on your own.
Joint venture examples
1. Caradigm (Microsoft Corporation + General Electric)
One of the better-known joint venture examples is the “Caradigm” venture between Microsoft Corporation and General Electric (GE) in 2011. The Caradigm project was launched to integrate a Microsoft healthcare intelligence product with various GE health-related technologies.
Another famous example is Hulu, which began life as a joint venture between NBC Universal, Providence Equity Partners, News Corporation and then The Walt Disney Company. Launched in 2007, Hulu was originally conceived to run programming from these four companies and their respective subsidiaries. Hulu has since developed its own programming.
3. Barnes & Noble + Starbucks
Other recent examples are Barnes & Noble and Starbucks (placing Starbucks coffee in bookstores)
4. Fiat Chrysler + Google
Fiat-Chrysler and Google (developing self-driving cars)
5. Samsung + Spotify
Samsung-Spotify (making it easier to use Spotify on Samsung devices).
6. SABMiller + Molson Coors Brewing Company
MillerCoors is a joint venture between Molson and SABMiller intended to distribute all their beer brands in Puerto Rico and the United States.
7. Ford + Toyota
Ford and Toyota began working together in 2011 to develop hybrid trucks.
Participating in a joint venture partnership requires your absolute A-game. Whether you’re just about to jump into business as a joint venture or have been in business for years, Business Mastery is the experience you need to grow your company and drive your success. Enroll today to discover more success tomorrow.
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