What is a joint venture?

The joint venture definition is when two or more parties unite to achieve a very specific goal, underlined by a commercial arrangement. The objective is some form of business activity, such as a new project.

Examples of joint ventures

There are many well-known examples of joint ventures (JVs). Google and NASA collaborated in order to develop Google Earth in 2005, for instance. A more recent example of a joint venture is the one between Vodafone and Telefónica. They originally joined forces in 2012 to fast-track the implementation of 4G mobile services. In 2019, they took this a step further – with the aim of launching a ‘future-proof’ network that would include the shared infrastructure for 5G.

How many types of joint venture are there?

Joint ventures don’t have a distinct structure they need to take, and so there are a number of different types. The most common ones are:

• Special Purpose Vehicle (SPV) – Where a limited company is formed explicitly for the joint venture agreement.
• Partnership or Limited Liability Partnership (LLP) – These have fiscal transparency, so each party is taxed directly on its share of profits and losses.
• Collaboration agreement – In this instance, a new vehicle isn’t created, but the JV is established in a contract.

Are joint ventures always 50:50?

JVs can have any ownership split, so while there are many with a 50:50 divide, others have 60:40, 70:30, or whichever split works for them.

How do joint ventures share profits?

This depends on how the JV has been set up – the joint partnership agreement should state how profits will be distributed.

How do I start a joint venture business?

After deciding on your JV partner and the goal you want to achieve, you’ll need to determine its structure. You should consider:

• The complexity of the venture
• The liability protection you’ll need
• The cost you’re willing to spend on setting up the JV

Following this, you’ll then need to draft a joint business agreement. Some opt to put together a term sheet or letter of intent during the preliminary phase of starting a joint venture business, the latter of which needs to be signed by both parties and can be legally binding. Both of these essentially outline the terms and conditions of the JV.

Joint venture partnership agreement

How joint ventures work

The process ultimately depends on the joint venture and businesses in question. You’ll need to think about (and ideally cover in a written legal agreement) the following:

• The structure and aims of the joint venture
• The financial contributions to be made by each party
• If either of you will transfer assets or staff
• Details around ownership of intellectual property
• Management of the JV (the responsibilities and processes to be followed)
• How liabilities, profits, and losses will be divided
• The process for settling any disagreements
• Exit strategies for both businesses

What makes a successful joint venture?

The key characteristics of an effective JV are:

• Good communication – This is an important part of any relationship, and should be treated as such. Consistent, honest communication where both parties listen to each other’s views is essential to making sure that responsibilities are clearly understood and disputes are handled more easily.
• Complete trust – Each partner should trust one another, and be fully transparent too. Any relevant information (especially that which is financial) needs to be shared.
• A focus on performance – Just as with your own business, you should have clear objectives that are measured by performance indicators.
• Flexibility – The world of business is a dynamic one, and you have to be open to adapting. Frequently review how the joint venture is working, and whether any changes are needed.
• Clarity – If everyone knows their role and how the joint venture works, this will avoid any disputes. It’s best to establish this legally through a simple joint venture agreement.

How do you end a joint venture?

This is dependent on how the JV was established. If it was for a specific project, then it can cease when the project is complete. If this isn’t the case and you want to exit the JV, you’ll need to look at the termination conditions in the joint venture contract. One partner can potentially buy the other out, or you can give notice to end the agreement.

Ideally, this agreement would also state:

• How shared intellectual property will be separated
• How confidential data will remain protected
• Who can claim any future income of the JV
• Who’s accountable for any continuing liabilities

Joint venture advantages and disadvantages

Are joint ventures a good idea?

There are a number of joint venture advantages. You can:

• Leverage combined resources, expertise, and experience within each business
• Make cost savings through economies of scale, especially with technology
• Share risks and costs, reducing the impact on one business
• Maintain flexibility, making sure neither business loses ownership and providing peace of mind that none of the parties are locked in forever
• Accelerate growth by more easily accessing new markets and overcoming barriers to entry

Having said this, there are some disadvantages:

• If the right legal provisions aren’t in place, the exit process may be more difficult
• Too little oversight can result in a lack of direction or even damage to reputation, and too much could cause tension in the relationship and performance problems
• If the JV ends, you may find all the technology and expertise you’ve shared makes your former partner a much stronger competitor

Why do joint ventures fail?

• Differences – From processes to management style, such distinctions can cause the joint venture partnership to struggle in accomplishing the objective it was set up for.
• Conflict – Whether one party is not providing its share of funding or resources, or there are communication issues or even disagreements, conflict could cause the joint venture to fail.
• Unclear aims – If the goals aren’t clearly established, then a JV is much more likely to go wrong.

A joint venture vs. partnership

What is a partnership?

A partnership is a single business entity which is formed by two or more individuals. As a joint venture can unite multiple entities, it’s not necessarily a partnership. Partnerships do not require legal agreements – but, as with JVs, it’s often best to have one in place.

Which is better, a joint venture or partnership?

Ultimately, this depends on your business goals. Joint ventures often go beyond profit, as they have very specific aims – though they do last a limited period of time. Partnerships usually last longer, but by their very nature require members to lose their business identity and offer less flexibility.