Joint ventures can be a cost-effective way to take on a new project that might otherwise be too unpredictable financially
A joint venture is the collaboration between two parties to achieve a specific outcome, usually within a defined timeframe. Saving money is usually the main objectives of joint ventures, with two organisations joining forces to share not only the costs, but also the risks.
Sharing capital and resources can be a cost-effective way to take on a new project that might otherwise be too unpredictable financially.
It is often the case that a separate joint venture company is set up, with each party owning shares and being responsible for associated costs on a pre-agreed ratio. A legal agreement is put in place that defines how income and outgoings will be split.
What are the potential benefits of a successful joint venture?
- Increased growth through greater production capability
- Enhanced access to resources such as key members of staff, new technologies, or a partner’s specific expertise in a business area
- Access to previously untapped markets
- An increase in profit levels
- Less risk due to shared capital outlay
Entering into a joint venture can also negate the need for an organisation to seek external funding from banks and other institutions. Having potential access to resources for research and development, whether that is funds or the equipment needed to test a new product, a successful joint venture can see both parties grow rapidly.
What makes a successful joint venture?
In short, great care in choosing the right partner is vital for success. Additionally, clear terms within an agreement that is legally binding, and set out in detail the responsibilities and entitlements of each party.
The first consideration is whether each party has the same intentions and objectives. Management styles and levels of expertise should either be equal, or complement each other to avoid clashes of personality.
Due diligence on potential partners
Due diligence processes might include:
• Investigating the reputation of a potential partner
• Ensuring they are financially secure as a company
• Looking at the management team that would be working alongside
• Checking whether they have a history of successful joint ventures
A written joint venture agreement will include, amongst other factors,
• How much money each party will invest in the process
• Whether a separate entity will be set up
• Who will own the intellectual property of the joint venture
• The responsibilities of each party
• How profits, losses and costs will be divided
Finally, a confidentiality agreement may be required for each party to the agreement, plus an exit strategy with a clear timeframe for completion.