As a business owner, there may come a time when you have a great business idea or opportunity but don’t have enough expertise and resources to fund it. Maybe you want to develop a new product. Perhaps you’ve gotten a glimpse of a government tender that could see you making millions and you would want to apply for it.
Whichever the case, your expertise, and financial capacity may limit you from venturing into the opportunity. When that happens, you might want to find an individual or entity that specializes in your field or industry and form a joint venture with them to pursue the idea or opportunity.
All About Joint Ventures
This article will provide you with tips on structuring a joint venture. We will also give you an overview of what a joint venture is, how it works, its advantages and disadvantages, then compare it with a few of its alternatives.
What Is a Joint Venture and How Does It Work?
A joint venture occurs when two or more entities pool their expertise and resources to achieve a common goal or objective. They share the risks and rewards. They are also responsible for covering the costs associated with accomplishing the task.
What’s notable about a joint venture is any legal structure can form them, whether a partnership, corporation or LLC. This business arrangement differs from a partnership structure in that it is temporary. The intention behind setting up the venture is to accomplish the common goal. Once that’s done, the joint venture gets dissolved.
Joint ventures can come into formation for many reasons. The goal can be to enter a foreign market, develop a new product, or fund an enormous project. However, the entities agreeing to form this business arrangement are, in most cases, looking to combine resources and expertise. They can decide to share the costs, profits, and losses equally or draft an agreement highlighting each party’s contributions and gains.
What Are the Benefits?
Several benefits come with forming a joint venture. Here are a few of them:
- Access to More Resources
Joint ventures enable the involved entities to combine resources, such as finances and other physical assets, to achieve a common goal. This business arrangement strengthens the capacity of both entities to accomplish the task and thus increases the chances of success. It may also enable you to access specialized resources, for example, software and technology equipment.
- Increased Expertise
Another benefit of joint ventures is access to new insights and expert staff. The two entities bring their expertise to the table to brainstorm and discuss ways to accomplish the goal. Having more ideas and insights on the table makes achieving the common objective more viable.
This business arrangement may also allow the involved entities to complement each other’s weaknesses and specialties. For example, assume you are a contractor seeking a government tender for bridge construction. In this situation, you can form a joint venture with an entity that specializes in road construction so that you become all-rounded.
- Increased Market Capacity
With increased financial resources, entities party to the joint venture can grow their market capacity. They can split costs devoted to advertising and marketing, thus achieving a wider audience reach.
Joint ventures are not permanent business arrangements. They only exist until they accomplish the common goal, and then they get dissolved. This business arrangement does not require you to commit to the long term.
Now that you have a rough idea of what a joint venture is, here are some hypothetical examples of joint ventures:
- Real estate developers join forces to develop a mall or skyscraper
- Two airplane manufacturers work together to build a space rocket
- Pharmaceutical companies form a joint venture to research a new vaccine
- Three car companies team up to manufacture self-driving cars
- An architect and contractor work together to construct a shopping mall
And now, here are some real-life examples of joint ventures:
- In 2009, Telefonica and Vodafone formed a joint venture to share mobile networks across many parts of Europe.
- In 2003, BMW and Brilliance Auto Group (a Chinese car manufacturer) worked together to manufacture BMW-branded cars in China.
- Samsung and Spotify formed a joint venture in 2018 to enable easy use of the Spotify app on Samsung devices.
- In 2011, Ford and Toyota structured a joint venture to manufacture hybrid trucks.
- Hulu started as a joint venture between four media titans: The Walt Disney Company, Providence Equity Partners, Comcast’s NBC Universal, and News Corporation.
What Are the Primary Advantages of Forming a Joint Venture?
- Share Risk
Every project or task, big or small, comes with its set of risks and challenges. By forming a joint venture, both entities share risks and costs. In the case of failure, no one entity bears the entire loss alone.
- Reduce Competition
Forming a joint venture may help reduce competition if the entities involved are direct competitors. This business arrangement increases the market share for both entities.
- Bypass Licensing Requirements
If the project you want to undertake requires you to get a license, forming a joint venture may enable you to forgo this requirement. Bypassing is possible if the entity you want to join forces with already has the required licenses and permits.
- Achieve Economies of Scale
Joint ventures allow you to pool funds together and thus take advantage of economies of scale. The entities can get cheaper production resources, labor, and advertising.
What Are Some Disadvantages of Forming a Joint Venture?
Like any business structure, a joint venture also comes with its fair share of cons. Let’s explore the disadvantages of this business arrangement.
- Might Result in Poor Integration
There might be a clash in organizational cultures and leadership styles, leading to poor integration of the involved parties. For example, one entity may support the idea of flexible working arrangements. The other may prefer a 9 to 5 work schedule. The clash in cultures may reduce cooperation and result in teams not getting along.
- Risk of Unreliable Coventurers
Some parties may not give 100% commitment. They may fail to do their part or not do it well enough, thus becoming unreliable.
- Risk of Unequal Involvement
Since different entities are working together, there might be an imbalance in investment, involvement, and expertise. The skillset of one party may require them to be more involved than the rest. This imbalance may result in one entity giving more than others.
Identifying a Good Match
How do you identify the ideal entity or individual to form a joint venture? Well, a suitable match has resources, expertise, and skills that complement yours. Additionally, their management style and organizational culture should be a good fit for yours.
Here are a few questions to ask when searching for an ideal partner:
- What’s their management style?
- What is their company culture?
- Is the entity financially stable?
- Does the entity have the same goals and objectives as you?
- Are they reliable and trustworthy?
- Does the entity have the resources and expertise you need or lack?
Look at the Partners’ Benefits
When selecting a joint venture partner, you also need to consider what benefits each party brings to the table. Each entity should be beneficial to the other. It should be a win-win situation for all involved.
If it’s only one party that’s benefitting, then the joint venture will be one-sided. Focus on the benefits that you and the potential match bring to ensure you select an ideal partner.
How to Structure a Deal
If you think forming a joint venture may be a good idea for your business goal or needs, follow these steps to make it happen:
1. Decide on the Type of Joint Venture You Want
There are two ways to set up a joint venture. You can choose to structure it as a separate legal entity where each party has an ownership interest. In this case, you may set it up as a partnership, corporation, or LLC.
You can also form a joint venture through a contractual agreement or relationship. This option only requires you to enter a sign a contract, and it is less expensive.
Consider the following factors when deciding which of these two joint venture types is ideal for you:
- Size and financial strength of both parties
- Whether you want liability protection or not
- The complexity of the joint venture
- Your budget for structuring the joint venture
2. Look For a Joint Venture Partner
Your second step should be to select a joint venture partner. Start by assessing your business needs or objectives, then search for an entity or individual to help you achieve them. You also want to consider joining forces with a partner who is a good fit for your entity.
Take some time to know the potential entity’s team. These are a few questions to ask before entering into the joint venture:
- Are they collaborative?
- Do they have the same level of commitment as you?
- What is their management style?
3. Draft Your Joint Venture Agreement
Once you identify your coventurer and decide on the joint venture type, you can draft an agreement. Its length and complexity depending on your relationship with other parties and proposed business goals.
Here is the information to include in your joint venture agreement:
- Purpose or intention behind forming the joint venture
- Process of formation (separate legal entity or not)
- Duties and responsibilities of each party
- Each party’s investment or contribution
- Sharing of profits and losses
- Exit strategy
- When the joint venture will end
4. Talk to a Lawyer
It’s better to work with a lawyer to draft the joint venture agreement. Lawyers are there to protect your rights and interests. Working with a lawyer throughout the entire process will help you identify and avoid pitfalls in your terms and conditions.
Joint ventures may seem similar to other business arrangements and structures, for example, partnerships and strategic alliances. They, however, differ in a few ways.
Joint Venture vs. Licensing
Licensing occurs when one entity permits another to use their branding elements, such as name and logo, to further their interests. The licensor (the entity issuing the license) receives a royalty fee from the licensee.
In the case of a joint venture, both entities would join forces to achieve one common goal. They share costs, profits, and losses.
Joint Venture vs. Strategic Alliance
A strategic alliance is a business agreement between two or more entities to achieve a common goal while remaining independent. This business arrangement differs from a joint venture in that the involved parties work separately to accomplish the required tasks. In a joint venture, the two entities won’t be independent. A strategic alliance may or may not have a contract, and it is not a separate legal entity. Joint ventures can be separate legal entities.
Joint Venture vs. Partnerships
The main difference between a joint venture and a partnership is that a joint venture is a temporary business arrangement that may or may not be a separate legal structure. A partnership remains permanent, even after achieving the common goal. Partnerships get dissolved with the consent of all members. Joint ventures also don’t need a name, but a partnership should have a business name.
Frequently Asked Questions (FAQs)
Let’s look at a few questions you may have about joint ventures:
1. Why do firms enter into joint ventures?
There are many reasons for two or more entities to form a joint venture. They may want to enter new markets, expand their business, develop a new product or service, or undertake a massive project. The intention, however, is to pool resources and expertise to accomplish the common goal since one entity may not manage to achieve it on its own.
2. Do joint ventures need an exit strategy?
Like any other business, joint ventures need an exit strategy. This reduces conflicts that may arise when one of the coventurers fails to commit to the agreement or wants to get out of it.
Business needs and priorities change over time. One entity may want to focus on something else other than the joint venture. In such a case, it’s better to discuss a way out in case anything changes halfway through the business arrangement. The entities should discuss and highlight the exit strategy in the agreement before officially launching the joint venture.
3. Do joint ventures need to be registered?
No, joint ventures do not need to file formal paperwork with the state. They are not a business entity, and they don’t have an official business name. The formation of a joint venture calls for drafting a contract or an agreement between the involved parties. You can also form them as a separate legal entity.
4. Are all joint ventures 50-50?
Joint ventures can have a 50-50 ownership split between parties. However, this is not a requirement. They can also have a 70-30 or 30-70 ownership. It depends on the percentage agreed between parties. The entity bringing in more resources and expertise gets a higher ownership stake.
Joint ventures also don’t have to share profits and losses equally. They distribute them as per the agreement between involved parties.
5. How is a joint venture taxed?
It depends on the type of business structure. Joint ventures may be taxed as partnerships or corporations, depending on the agreement between the parties. They may be subject to double taxation like a corporation or pay taxes at the individual level like a partnership.
6. How does one set up a bank account for a joint venture?
To open a joint venture bank account, visit your bank of choice. Setting up the account requires both entities to submit their EIN and identification details of the signatories for proof of identity. They should also issue a copy of the joint venture agreement and present their business name if the joint venture has a fictitious business name.
A joint venture is an agreement between two or more entities or individuals to achieve a common goal. It’s important to note that this business arrangement is temporary. It comes to an end once the common goal or objective is achieved.
Forming a joint venture allows both parties to share the cost, risk, and profits for achieving the common objective. It enables them to combine expertise and resources. However, one disadvantage is that there may be a culture clash.
To structure a joint venture, you first need to decide its type. You can choose to form it as a separate legal entity or use a contractual agreement. You also need to select the ideal joint venture partner. Afterward, draft a joint venture agreement. It’s a wise choice to work with a lawyer through the entire formation process.
Below are a few resources that can help you expand your knowledge in the field of joint ventures. Many of them are search results, and that’s by design to give you the latest and most popular information.
We have gone over a few joint venture examples but there is a lot to look at that goes beyond the scope of this article. Using the link below allows you to dive into the thousands of examples you can use to expand your knowledge.
Partners and Directories
You may have found that creating a joint venture is a good idea for your business. Now you may be thinking, how do I find one? With joint ventures, you must focus on a joint venture that compliments your products and services and provides something that complements your partners’ products and services. Therefore, you want a partner in that domain.
Your partner may be local, or they may be in another part of the world. So why not have a look at the Google search result below that may help you come up with ideas for finding the right joint partner?
To expand your understanding and knowledge with joint ventures, explore the books available to see which ones appeal to you.
You may want to look at what courses are available that can help you improve your skills and knowledge and create joint ventures. See
The news is another source of information. See the link below if you’re interested in finding out what stories the media is covering related to joint ventures.
You may be interested in expanding your knowledge through YouTube videos which can be an excellent source of information for visual learners.