A joint venture is a partnership between two businesses for a finite period of time in order to achieve specific goals, presenting the opportunity to leverage each other’s strengths while compensating for any weaknesses.
In one type of joint venture, both parties enjoy the benefits of remaining as independent businesses and choose to enter into a contractual agreement only to collaborate in a limited way over a pre-determined time span. The other option is to create a separate joint venture company in order to complete a specific project or contract. In this option, both partners own shares of the company and direct its management.
The success of a joint venture depends on a well-planned strategy, strong partners, equal contribution, effective execution of the agreement, and fast and efficient integration of work processes. This involves commitment and respect for the other company’s work culture and a clear understanding of each one’s responsibilities and accountabilities in the partnership.
So, what are the main benefits?
A successful joint venture can help both businesses gain access to new opportunities and is an effective strategy to grow and generate profits faster. Advantages of a successful joint venture include access to knowledge and resources such as capital, staff and technology; access to new opportunities such as new markets or greater distribution reach; and shared exposure to risks, financial responsibility and workload.
And the risks?
A large number of joint ventures fail because of the many risks involved and the complexity of integrating operations and work culture of two different companies. Some of the issues that may arise when entering into a joint venture strategy include unequal contribution of the partners in knowledge, resources or investments; unclear communication of objectives of the joint venture strategy; lack of communication of the accountabilities of each partner resulting in an unsuccessful execution of the joint venture agreement; difficulties in integrating operations of the two companies due to differences in work culture and management styles; and lack of leadership from the partners at the outset of the joint venture.
Building a successful joint venture strategy can be challenging and takes time, commitment and effort from both parties involved. Right from the outset it needs to be structured properly with good advice from a lawyer covering the legal considerations and an accountant covering the financial, accounting and tax aspects.
Before entering into a joint venture, both partners must have a clear understanding of the objective of collaboration which must be translated into a simple written agreement that defines each partner’s accountabilities in the joint venture. I am a great believer of the “KISS” (keep it simple stupid) principal when drafting joint venture, collaboration and strategic alliance agreements – the more complicated and protracted the agreement is trying to cover all eventualities under the sun tends to create more complications between the parties further down the line and in practice becomes an unworkable document. Evaluating the strengths and weaknesses of the partner company and your own can help in building on each other’s strengths.
Building a strong alliance with the right partner can result in fast growth of the business and profitability.