The advantages and disadvantages of joint ventures

The meaning of ‘joint venture’ in business

A joint venture is a business entity set up by two or more parties cooperating on a specific project to achieve a common goal. It typically involves shared ownership, shared risks and rewards, and shared governance.

The joint venture will normally end when the goal is achieved, so the time period can vary, but five to seven years is fairly typical.

As well as being a great way to break into new markets and provide access to new skills and capabilities, it can also help to scale efficiencies by combining assets and resources and share the risk for major projects and investments.

The difference between a joint venture and a partnership

The best way to explain the difference between a joint venture and a partnership is to think of a joint venture as a trade agreement between two countries.

Under a joint venture agreement, the two countries remain their own separate countries but they work together for a specific purpose. The two countries remain legally separate from each other and continue as separate countries once the joint venture ceases to exist.

In a partnership, the two countries would merge together to become one country. This new country would be a separate legal entity operating in its own right.

Joint venture examples

One of the best-known joint venture examples is Sony Ericsson.

Japanese company, Sony, and Swedish firm, Ericsson, started a joint venture in 2001 to manufacture phones and other electronics. In 2011, Sony bought its partner out.

Ford and Toyota formed a joint venture in 2011, using Toyota’s hybrid expertise and Ford’s strength in the American truck market to develop hybrid trucks.

Advantages and disadvantages of joint ventures

While a joint venture can appear attractive for pooling resources to maximise profits with minimal or no investment, it’s not something to jump into without careful thought and consideration.

Let’s look at some of the pros and cons of joint ventures, to help you assess whether it’s the right decision for your business.

Benefits of a joint venture

Some of the benefits of a joint venture include:

• Shared resources

The ability to share resources with little to no capital outlay is a great advantage of joint ventures. The shared knowledge, expertise, and resources allow the companies to expand into new markets, growing in a relatively low-risk way.

• Access to new markets

For businesses that want to broaden the geographic market in which they operate, or increase their brand awareness to new audiences, a joint venture is ideal.

• Flexibility

While the companies work together on the joint venture, they can both continue their own business activities unrelated to the joint venture.

There’s also a timeframe on the agreement, so the companies aren’t bound to each other when the joint venture agreement ceases.

Drawbacks of a joint venture

And the drawbacks of a joint venture? Of course, all business carries an element of risk, a joint venture is no different.

• Accountability

If something goes wrong, both companies are liable, which includes any legal claims that arise.

• Restrictions

If your joint venture agreement includes non-competition or non-disclosure clauses, this could limit your company’s ability to interact with other organisations.

• Equality

A joint venture is not always a 50:50 split. Resources could be contributed unevenly, which can lead to problems if profit sharing doesn’t adequately compensate one side or the other.

If the objectives aren’t clear, the communication between the two companies is poor, and the workload isn’t considered equal, conflict can arise.

Types of joint venture

In the UK, joint ventures can either be an unincorporated joint venture or an incorporated joint venture.

Unincorporated joint ventures are businesses that form a partnership, a co-operation agreement, or a strategic alliance. 

Whereas an incorporated joint venture is a company or a limited liability partnership (LLP) that is a separate business entity with its own legal personality.

The three main types of joint venture

1. Limited co-operation

Limited co-operation is when you agree to collaborate with another business in a limited and specific way.

For example, a smaller business may use the distribution network of a larger business to sell a new product. A contract would be in place between the two companies to outline the conditions of the arrangement.

2. Separate joint venture business

A separate joint venture business is often a new company that’s set up to take on a particular contract. The partners own shares and agree on how the company will be managed.

3. Business partnerships

Another option is to set up a business partnership or a limited liability partnership.

Limited liability partnerships for tradespeople

Joint ventures have their advantages and disadvantages. If you’re considering a joint venture agreement, we recommend you consider your options carefully, take time to plan properly, and also seek legal advice. A legal representative can use a joint venture agreement template to make sure your interests are fully protected.

FAQs

What are the risks of joint venture?

The risks of a joint venture include finding a person or company you can trust to pair up with. Both companies are liable if something goes wrong, and it can limit your opportunities to work with other organisations, depending on the clauses in your joint venture agreement.

Why would you want a joint venture?

Businesses may want a joint venture to break into new markets in a relatively low-risk way with little to no capital investment.

Are joint ventures successful?

A joint venture can be successful, but if entering into this type of agreement, choose a partner who shares your company’s values and standards and make sure you get a detailed joint venture agreement in place.