10 May What Is a Joint Venture?
By: Barry E. Haimo, Esq.
May 9, 2016
What Is a Joint Venture?
If the name “joint venture” makes you think of two people or entities working together to achieve something, you’re on the right track.
Joint ventures typically describe a business transaction wherein two (or more) already established companies legally agree to work together to achieve a mutual goal. Essentially, like a general partnership, both parties are both helping each other with the intent of growing their individual profits or market share. In other words, it’s basically the business world’s way of saying, “If you help me and I help you, we’ll both win.”
What are some of the benefits?
- Access different resources and expertise on both sides
- Access new distribution channels and new markets
- Access additional purchase power and financing
- Access foreign markets with license and regulatory requirements
- Avoid taking on more debt
- Avoid having to commit your resources
The idea behind a joint venture is to work with a company that is strong in areas where you are weak and vice versa, so you can each benefit from the other’s strengths.
So, for example, if you had a business with an established sales team and customer base but were having trouble finding your next big product, you might want to consider teaming up with a company whose strength is in innovation and research and development but has no existing network to help them sell what they produce and manufacture. By working together, both parties can achieve more.
The Two Ways to Create a Joint Venture
If you are interested in creating a joint venture with another organization, you have two options available to you.
Option one is to agree to cooperate in a very limited, very specific way. For example, a business with a product could set up a joint venture with a distribution company to get their product out on shelves. A contract would be drafted detailing the terms and conditions of this deal.
Option two is for two businesses to work together to set up a third, completely separate company. This third company would then be in charge of managing the operations of the joint venture and accomplishing the specific purpose of the business.
How Joint Ventures Work
In many ways, joint ventures are like general partnerships. All involved businesses agree to contribute their assets, resources and talents (which may include property, cash, assets, or additional resources) so everyone can successfully complete the “venture” in question. An agreement or contract will generally always be created outlining how the venture will be managed and controlled, the rights and duties of all parties, the intent of the parties for establishing such joint venture, as well as how profits and losses will be divided.
So why not just call a joint venture a partnership?
Because, generally speaking, partnerships are long term, ongoing relationships. You can partner with someone to create a company, to engage in an ongoing business for an indefinite time. In contrast, joint ventures tend to be temporary in nature and may terminate at a time specified in the contract or agreement, upon the accomplishment of the purpose of the venture, if it is apparent that a joint venture is not profitable, upon the death of an active member, or if a court decides that serious disagreements between the members or questionable behavior of a member make its continuation impractical.
Examples of joint ventures include all of the following:
- Costco and American Express
- Apple and AT&T
- Samsung and Google (Android)
- Airlines and Credit Cards
If you are seriously thinking about a joint venture, make sure you thoroughly vet the other company and work with an experienced attorney to prepare a comprehensive agreement reflecting the terms and conditions of the venture, such as the business objectives, employee roles, deployment of resources, expectations, how to handle disagreements, what each company will be contributing, who will manage the venture, and so on.
Barry E. Haimo, Esq.