Joint Ventures: A Simple Introduction

Whether you're new in the art of business or have been an entrepeneur for some time, you'll eventually come across the idea of becoming part of a joint venture. It may sound like a bit of complicated business talk but a joint venture is a variation on the age-old idea of a business partnership. Though, of course, it's a lot more complicated than that.

Joint ventures are legal entities created when two or more companies pool their resources for a single goal.

As legal entities, they are similar to corporations, able to operate independently of its founding companies and has the corresponding rights as a business operation – this means it can acquire properties, has separate liabilities and assets and can sue and be sued in court. Joint ventures usually come about in the way that all partnerships usually come about – one party has something that the other wants and the other party is willing to share its resources to the benefit of both. Joint ventures are formed by small companies hoping to expand, while global companies usually does them so that they can enter a particular country's market.

There are several advantages to joining a joint venture. The primary one is that a joint venture is a shared business – liabilities and assets are divided evenly between two or more partners. This can enable the participants to have higher profit margin for a lower amount of risk. Usually, when a business enters a new market, the risks involved can be terrifying for a new company – even larger corporations tread lightly when they enter a market. Going into a joint venture with partners can make sure that the price of failure is not devastating for the company.

Another advantage is that partnering with someone who already has the infrastructure ready for your product enables you to deliver the product faster than other businesses. Trying to build up a distribution channel is a difficult proposition. It costs money and can be subject to delays – having ready-made distribution points provided by your partner can make it easier for a company to deliver the product and helps them focus on one part of the operation. Joint ventures also carry with them the weight of the partners' reputations – having a well-known and trusted brand backing you will often help you sell your product more.

There are, of course, disadvantages. The primary one is that all of this profitability depends on your partners' dependability. Having unscrupulous or less-than-stellar business partners can cost you a whole lot of money. Another one is that a joint venture often involves integration and this can be difficult for both parties – culture clash and integration problems will crop up, if you're not careful.

It sounds all complicated but the process of going into a joint venture is actually very easy. The formulation of a joint business plan is almost always the first step; it assures that all the participants are on the same page and assures them about the efficient division of work. After that, legal and binding agreements are signed to confirm the partnership and it goes forward from there.

Joint ventures are a great way to penetrate a market and I hope this brief introduction gives you the bare bones of what you need to get into one.

What You Need To Consider When Choosing A Joint Venture

When you are putting up a business, one of the main things that you have to decide on is whether you can do it on your own or partner with other people. This may seem such a no-brainer but don’t be fooled because this is one of the most important decision that you need to make in your life. Partnerships with other people may seem a good idea but in the long run they can also be a headache especially when you don’t get along well with your partners.

If you can’t decide and you need help choosing, here are some of the things that you need to consider when “venturing” into a joint venture.

1. Do you know your partner well?

One of the worst things that can happen to you when starting a business is to get a partner who will only be a burden to you. And trust me, there are plenty of cases like this in the world of business. Some were even long time friends back in the kindergarten, decided to put up a business when they were fresh out of college and then ended up hating each other because of the business. This is why some people choose members of their family to be partners with and this is also why some people do not.

Before partnering with anybody, make sure that you know your partner well. Do you have the same work ethic? Do you have the same drive? Do you have the same vision for the company? Can you trust him or her with your life? These are just some of the questions that you need to ask before you can really decide.

2. Do you need the money, expertise or the extra hand?

If the basic concept of the business is your idea, it is recommended that you put up the business on your own instead of seeking a partner. You only need a partner if you need a person’s expertise in the field or your money is not enough to raise funds for the business. A partnership is also a good idea for people who have full time jobs and are only doing the business as a side job. They need the partner who can help them run the business.

If you do not really need any of these three, I would advise you to start the business on your own because there will be less headaches.

3. Can you work with a partner?

Some people work well with others while others are complete disasters when it comes to dealing with other people. Examine your personality and see if you are cut out to be in a partnership. This means that you will not be boss and will have to compromise. It’s like having a relationship. If you can be in a partnership, then choose someone who can also be in a partnership. Check also how you guys work together and how you can be complementary to each other.

It Takes Two: Starting Up A Joint Venture

One of the problems with starting up a business or trying to enter a market is that sometimes you have the expertise but none of the money or you have all the capital but none of the manpower or the requisite knowledge. It's kind of risky when you're starting after all.

That's where starting a joint venture comes in. A joint venture is essentially a limited form of legal partnership that spreads the risk of a business between two or more partners. Joint ventures are usually dedicated to one purpose though there are several ventures that are continuing business relationships – MSNBC, Microsoft and NBC Universal's cable news channel, being a prime example of an ongoing joint venture.

The lessening of potential loss for both partners is one of the more obvious perks of being in a joint venture, but the fact that you and your partner share resources and expertise is the main point. He may have information on the marketplace and already have a distribution channel set up, while you have a product that you think is appropriate for the target demographic and just needs to reach the customers. Combining your skills is a no-brainer.

So how does one go about going into a joint venture? Well, of course, the first step is getting a partner or partners. Write up a list of prospective partners and do a thorough screening – checking on the company's history and determining whether they are what you're looking for. After that, you should contact your potential partner so that you develop a business plan together – this includes both how your business relationship begins and ends, if your venture will be a limited one. Another part of the business plan will be how your companies will be structured to accommodate each other and how the income will apportioned.

When you've cleard up the nitty-gritty business details, it's time to go into the legal stuff. When you're dealing with the finer points of business law, it would be best to hire a lawyer – yes, it may be expensive, but it will be even more expensive in the long-run if you don't hire one to draw up your partnership agreement. An ironclad legal agreement is the best defence against any future litigation that can be sent in your direction. Here are the main points that should be highlighted in your joint venture agreement: how intellectual property rights are dealt with, how the venture is managed, what the partnership covers in terms of business and what each partner is supposed to contribute to the venture.

It should also be noted that the legal agreement must also cover how the venture may end – you may have achieved your goal, or you and your partners' interests have diverged or you have agreed to end the partnership at a particular time.

And there you go – that's how you start your joint venture. Of course, it's a simple introduction but the details will be unique in your situation and the legal stuff will require a more detailed explanation but that's all you need to go into business with someone else.

What are the elements of a good joint venture?

Joint ventures are not always successful. This can be hard to imagine especially when it promises a lot of benefits for all concerned. There is less risk. There is sharing of resources. There is more people to get ideas from. There is help around. Generally, it is like having another you working towards a goal.

Joint ventures can be entered into by two or more parties depending on the need. Often, joint ventures are created in order to produce a product or realize a project that will need different resources and these resources cannot be provided by just one person or company. Think about it as organizing an event. To plan the party and make it a success, you need a good caterer, a good party planner, great sound system, decorations and stage set-up. Each of these companies provide expertise that you cannot provide. When these people or companies come together, each putting their own products, technology, service or expertise on the table, that is what is called a joint venture.

There are several vital elements to a joint venture and you need to look into each one to make sure that it will be a success.

The first one is the partners involved. Who will be the partners in the endeavor? Do you know them? Have you researched their personal background and company history? If it is a company, have you reviewed its performance and its current CEO or its leadership in general? It is important that you know these things about the partner that you will be seeking. A joint venture can fail when two incompatible partners come together.

The next element is the contractual agreement. This is established so that the partnership, the goal, its duration and the contributions of each will be put into writing. This minimizes confusion and other potential problems in the future. Discord will also be avoided because people will know what their role is.

Another element is the purpose and duration of the contract. Joint ventures are not forever although it may seem like it. It can be long-term or short-term. Often, joint ventures do not last long, often along the duration of the project. Some though especially those who have products to sell, continue for years and years until a partner decides to back out of the contract or refuses to extend the contract. It is advisable that the duration should be two to three years after the “creation period” to give time for the product to get into the market.

Partners in the joint venture need to put into writing how long the partnership will last and if there is a provision for extending the contract for another period of time. This should be established at the start of the partnership. This way, everything is clear and each partner knows for how long the venture will be.

Lastly, there should be the joint property interest, which states which properties are shared and will be distributed to the partners in case the venture is dissolved. This states the percentage of the joint property that each partner will get depending on their initial and continual contribution.

Pros and Cons of a Joint Venture

There are just more than enough accounting and business reasons to get into a joint venture. Your company could truly benefit from partnering with other firms with complementary resources and abilities like distribution channels, technology, and finance, among others. It is not surprising that these days, almost all companies are getting into or at least considering participating into joint ventures. Take note that not all joint ventures succeed. Experts assert that only about 40% of such business endeavors last and achieve goals.

Getting into a joint venture is like getting into a give and take relationship. In such a business effort, you should also contribute to the alliance instead of just reaping benefits from it. Your contribution could also be in the form of capital or expertise/technical share. Just like any other business strategies and measures, joint ventures have their own sets of general advantages and disadvantages.

First on the list of pros, a joint venture could bring about opportunities to gain or learn new expertise or capacity. Even major or huge companies decide to get into such initiatives especially when they lack specific technical capability or expertise. Through a joint venture, they could learn the skills and technical capacity they need by the end of the partnership.

Second, a joint venture could enable companies to enter into related business activities, reach new geographic markets, or attain new technological skills or knowledge. The businesses could access greater resources, including new technology and specialized staff.

Of course, a joint venture would force companies to share risks. If your business could not gather the guts to try out a new initiative or project because of the risks involved, you could still pursue the endeavor by making it a joint venture with other firms. This way, the chances of success are made bigger and more achievable. Joint ventures are naturally flexible. It could exist in a limited, specified period or just cease to operate once common objectives and business goals are met.

For the list of cons, joint ventures could be taken as mere strategies of opportunistic partners to gain exposure to a new business segment. In many cases, some companies also use the effort just to poach technical experts and professionals from other companies. Joint ventures could also end up in disaster. According to market analyses, up to 60% of all joint businesses worldwide end up in failure.

It could take too much effort and time to establish the right and healthy relationship between joint venture partners. There could be inevitable problems. The joint venture objectives and goals may not be fully clear and well communicated to all participants. There could be imbalance in the level of investments, expertise, and assets infused into the project by the partners. Then, there could be less cooperation and poor integration because of varying management styles and cultures of joint venture partners.

Remember that is always imperative to review your current business strategies and objectives prior to committing into any joint venture. It is important that you first choose the right partners and re-assess your need to actually partner with anyone or any other business for a project of endeavor.

The Pros Of A Joint Venture

A joint venture refers to a partnership between two or more people for a business. It differs from the word “partnership” in the sense that it is more formal and in more legal terms. In a joint venture, the two parties sign a legal agreement that they will be sharing the tasks and the risks of the business or the new venture.

Most start-up businesspeople opt for a joint venture as opposed to single proprietorship or multi-partners or corporation. Here is a brief rundown of the reasons why a joint venture is a good choice.

Less risk

For people who are just starting their business or are virtually novices in the business arena, it can be frightening to just plunge head first and not have someone with you to cushion the risk. Having a partner or partners will make your investment smaller and therefore, lesser risk for you should the business fail. This is ideal for young entrepreneurs who are just testing the market and are not yet sure of their business ideas yet or those who are going into a field they do not know.

Having a go-to guy

When you have partners, there will be division of labor. Thus, you don’t need to do all the work yourself. You can divide the work among the partners where each one will handle one aspect of the business. This set-up is ideal for those who are doing the business part-time and would not be able to look into the business 24/7. If you can’t make it for instance to look at materials or check the quality control, at least, you have someone who can take over the reins for you. This does not mean however that you have the right to slack off.

Single proprietors hire people to this for them but sometimes, it is better to have someone who you can trust. Employees are also seen as not having the same kind of passion and commitment to the business as perhaps a partner because they do not have a personal stake on it. Thus, they cannot be relied on the same way as you can rely on a partner.

Having someone by your side

For some people, they do not really care about the investment or the risk, they just want someone to be there should the business fail or have problems. Having somebody to rely on in times of trouble is vastly reassuring. Besides, although you can hire people to be there for you, there is nothing better than having a friend or someone you trust by your side.

More ideas

Two heads are better than one or so the saying goes. Having many partners means that you will also have a lot of ideas to choose from. These can be good for the business especially when you are strategizing on marketing your products or thinking of a product idea or an additional service. The more people you have on your side, thinking for the business, the better.

Advantages of Joint Ventures

A joint venture is business association with two or more parties merging resources for a particular purpose or project. Setting your business goal/s is the first step when entering a joint venture. Your goal may one of the following: expanding a marketing coverage, sourcing out information and business links, building credibility with a specific target market, or accessing new markets that is hard to aim in a solo business. After you have set your goals, you should look for a trusted business co-participant who shares a common goal. Third step is exchanging business concepts with your chosen co-participant. Fourth step is securing the joint venture by written agreement. You need guidance of a legal professional guidance to do this. Here are the following advantages of joint ventures:

1. Access to new technologies - If you want to enter into global markets and have a prosperous business, access to state-of-the-art technologies is very important. Joint ventures can provide a thriving or growing business with right new technologies that a solo business cannot develop due to costs or other resources constraints. Investing on new technologies offers risk but if a purchase is based on well-thought planning, failure can be avoided.

2. Cost reduction – Costs of production, distribution, technology, transportation, and other needed capabilities can be reduced with joint ventures. It is much easier to focus on product or service enhancement when you don’t worry so much about exceeding and impractical costs. If this is the case, you are most likely to expand your business eventually.

3. Provide participants the opportunity to learn - Forming an alliance allows the participants to work with other businesses in the same or related industries. This provides participants with the opportunity to learn from each other's successes and mistakes.

4. Sharing risks - Joint ventures allow participants to exploit new opportunities. To be successful in a project, participants must have rapport and open communication. The very important role in sharing risks is the square root rule which means the success of a particular project depends on the risk preferences of the venture participants.

5. Improves market credibility, penetration and access - All businesses struggle at the start in building acceptance, penetration and access within their target market. Joint ventures allow customers to have trust and confidence on a particular project. It also helps attract more customers and improves coverage.

6. Lesser chance of your partner becoming a competitor - Since your fellow participant in a joint venture alliance have similar goals, interests, and business perspective with you, merging resources upshot to lesser chance of competition when it comes to the particular project.

7. Better market feedback - When a business is able to provide state-of-the art technologies, better market coverage, enhanced credibility and penetration, customers are able to give feedback more. Joint ventures are healthy alliances that help a business understand better their market. By allowing you to focus on developing your strengths, joint ventures provide the ability to respond more quickly and effectively to change. In some cases, joint ventures also allow you to open up to global opportunities.

Why a Joint Venture?

Between a joint venture and a single proprietorship, a joint venture wins hands down when it comes to popularity points. Many people start their business in a joint venture especially the young ones who are just testing the market. Just what is it with joint ventures that people prefer them more to single proprietorship?

For one thing, a joint venture means that you have partners on your side who will care about the business as much as you will. This reason is enough for some people especially those who just want somebody by their side to help cushion the blow in case it does not become a success. There is after all easier to accept that you and a partner failed in a business than you failing alone.

Another benefit that joint ventures have that is very attractive to young people who are starting their business for the first time is the fact that there is less risk involved. When you have partners, you will need to invest less money and also less time. You will also not be responsible for the whole company. If you are fresh out of college and you do not have the money to invest, having a partner who will raise the other half of the capital is important.

Some people also go for joint ventures in exchange for something that they are lacking. For instance, people who have the idea but not the expertise can partner with someone who is knowledgeable in the industry to make the idea come to life. Someone who has the money but do not want to do all the dirty work can partner with someone who do not have the capability to finance it but have the knowledge on how to make it work. These people are called the financiers and the industry partner respectively.

Some people partner with others in exchange for a service. One will become the brains while the other is the operation. Others seek partners by virtue of their contacts and connections with agencies. With that person on board, selling the products will be easier. The same goes with those who seek partners purely for their citizenship as with foreigners who want to start a business in a foreign land.

Joint venture can be a success provided that clear parameters were set at the start of the business and that the two partners have the same work ethic, work personality and vision for the company. Ideally, they should also be able to complement each other work wise. For instance, one can be good with numbers while the other is good with the design. One will take care of the administrative while the other works on the creative. This way, each will have a contribution to the team and therefore preventing discord between the two or among the partners.

Another important criterion is of course trust. The two partners must be able to have faith in the other. They should also be able to reach an agreement and both must know how to compromise if they want the partnership to work.