What is a Joint Venture?
A Joint Venture (JV) is a corporate restructuring strategy. It is an agreement between two or more parties to combine their resources (generally: capital, know-how, execution capability, local network) in achieving a common business goal. Unlike most partnership arrangements, Joint Ventures are for a limited duration and specific purpose.
Since each party to the JV contributes its core competency (resource), parties under JV can leverage upon their combined resources and achieve their business objective effectively and efficiently. Further, the combined effort made by all the JV entities improves the probability of success as against the individual effort.
- What is a Joint Venture?
- Benefits of entering into a Joint Venture
- Types of Joint Venture – with the Example
- Key Success Factors for Joint Venture
Generally, the Joint Venture Agreement (JVA) is signed by all the parties involved in JV. A good JVA explicitly covers the objective/purpose for the formation of JV, liabilities, and rewards for each party against their respective contribution, term and termination clauses for JV, and governing laws in case of any dispute.
Benefits of entering into a Joint Venture
- Access to key technical know-how / patented technology
- Access to a local distribution network, knowledge of local culture and customers while entering a new market
- Instant access to other parties’ core resources and the ability of a new entity to build upon combined resources
- Since JV is a different entity, the liability is limited
- Reduction in risk as against solo venture
Read more about other corporate restructuring strategies.
Types of Joint Venture – with the Example
As mentioned earlier, the joint venture entities bring their own core competencies to the table to achieve mutual benefits.
- Private Companies gaining access to resources / technical capabilities
- Government bodies for building infrastructure (Public-Private Partnerships)
Key Success Factors for Joint Venture
The objectives of all the parties involved in the JV should be aligned to a single business goal. This leads us to the key factor of JVA, i.e., purpose. The purpose of JV should be clearly spelled out in JVA, and all the parties should tend to benefit from it.
All the parties in JV should contribute their core competencies with the single objective of making a success out of JV. If JV partners have a hidden agenda of taking undue advantage of JV, such JV’s are bound to fail. Hence, under thorough due diligence of JV parties is needed. Moreover, trust between parties is also an important factor.
Risks, Responsibilities, and Repercussion
The JVA should clearly define the rewards (profit sharing), risks/liabilities, and repercussions on each party if the JV fails to deliver the desired results. The roles and responsibilities should be clearly defined and understood by all the entities involved.
Parties need to understand that JV is not the branch or subsidiary. Hence, trying to gain undue management power or playing political games would not help the business objective. Having apt leadership in place will only improve the probability of JV success.
Business Plan & Performance Review Schedule
Before entering JV, each entity should prepare a detailed business plan separately. Assumptions made by both entities should be shared and made clear to each other beforehand. Moreover, the performance review should be planned beforehand so that both parties are on the same page for achieving the set business objective. The performance of JV evaluated early can save each entity from wasting its resources.
Exit / Termination Clauses
Generally, JV’s are created for a definite time and purpose. Hence, it favors all the entities if exit strategies are well documented. Though termination clauses are part of most of the JVA, it is recommended that disputes or differences between parties are resolved without formally invoking the termination clause.
Joint Ventures are the best and most effective way to undertake the business objective that requires capabilities that are over and above one entity’s core domain of a business. By way of JV, entities can pool their resources and achieve the business goal with limited liability. Entering into JV reduces the cost of developing domain knowledge and improves the probability of achieving success.