A joint venture is a type of corporate entity created for the purpose of investing jointly with another company or enterprise on a particular business project. They may be formed through various different ways, but typically the investor will contribute capital and management skills to enable the venture to achieve its objectives. Joint ventures can also take many legal forms such as limited partnerships, general partnerships, and combinations thereof.
In finance, a joint venture is an agreement between two or more parties that help each other with doing things such as financial analysis and buying goods and services related to their businesses. They are known to be risky but can be profitable if done correctly.
A joint venture is a legal structure that allows parties to share information and use each other’s resources. For instance, an insurance company might wish to enter a joint venture with a medical company whose expertise is in connecting patients with certain conditions with doctors who can treat their ailments. Sharing data and referrals could help both parties expand their reach and profitability. Since the venture may be considered an extension of both companies, it is essential that they set up guidelines for how the venture will operate before entering into it.
For example, the insurance company could promise to support the venture by providing insurance referrals for patients who are referred to it by the medical office. The venture would have to agree not to directly compete with the other party’s business practices, or else both parties could be found in violation of antitrust laws. To protect themselves, each party would also probably insist that they own a majority of shares in their joint venture.
A joint-venture agreement can be as formal as a contract between two companies and as consistent as an informal alliance among several parties. In both cases, an essential component is agreement on roles and responsibilities; it is critical that each firm clearly understand its obligations and those of the other partners.
Joint ventures are often used by larger companies when they are confronted with an opportunity that is too expensive or difficult to pursue alone. For example, when a smaller company is faced with building a large factory, it may require the help of an established firm whose name the small company does not have, yet which has the money and expertise to make things come together.
Although some joint ventures may be beneficial to both parties, most entail some degree of risk for everyone involved. When done properly, however, they provide opportunities for growth and new business practices that allow each party to gain more experience in various areas.
Joint Ventures Vs Alliances
A joint venture is generally distinguished from an alliance, where the parties are not legally separate companies. An alliance is typically used for ventures that involve more than two parties, whereas a joint venture generally does not include more than two or three parties at any given time. A partnership, on the other hand, is between one or more entities and others who are not legally separate entities; it may be defined as a four-person business established on the principle of partnership.
When one or more parties to a venture decide to leave (or become financially unable to continue) due to financial issues, the remaining members of the venture can continue on their own with an option to purchase all of their original shares at any price they choose. The venture may be dissolved by all parties choosing to dissolve it at their own will. When the venture is dissolved, the remaining members are free to continue on their own or form another joint venture.
It is important for partners in a joint venture to have formal agreements for how things are handled should one of the partners leave because not all joint ventures are theoretically compatible. A joint-venture agreement sets out how the parties work together, including sharing information that is helpful in advancing their individual businesses.
A joint-venture agreement can be classified into four:
- Project Joint Venture. Created for specific purposes like creating a toll road, an office complex etc. The purpose of this kind of joint venture is clearly defined and limited to the completion of the single project as per the agreement of the venture. The Joint Venture arrangement comes to an end at the completion of the project.
- Functional Joint Venture. In this sort of arrangement, two companies come together because each has expertise in areas of mutual interest and they both therefore wish to build a symbiotic environment they can both benefit from.
- Vertical Joint Venture. The Joint venture here is between businesses in a similar supply chain. This arrangement is often entered into when one of the entities produces a kind of specialized good the other entity requires. For this purpose, they enter into this arrangement to develop and maintain the capacity of future production and avoid the uncertainty arising due to unavailability of this input material.
- Horizontal Joint Venture. This form of Joint venture happens between businesses producing similar goods or services. A joint venture arrangement here avails them considerable advantages both in terms of scale and geography i.e., the local partner has the know how of the local country such as established distribution network while the foreign partner can have the economies of scale.
Should you enter a Joint Venture Agreement?
Although a joint-venture agreement can provide significant benefits and opportunities for growth and expansion, it is also fraught with peril. For instance, what happens if one of the partners is found to be withholding information or otherwise operating in bad faith? There will always be some risk in this arrangement, so it is important to weigh the possible rewards against potential problems before entering such an arrangement.
If you are considering entering into a joint-venture agreement, it is wise to consult with a professional financial analyst or an attorney who can review the finances and language of the proposed contract and offer important advice on how to enter into such a venture with as little risk as possible.
