What is a Joint Venture Agreement?

A joint venture happens when two companies combine in the pursuit of executing a specific project plan while maintaining their status as independent entities. In a joint venture, both parties agree to pool their assets, share the risks, and share expenses and profits. Corporations, limited liability companies, and partnerships can merge to establish a joint venture. A joint venture agreement is a legally binding contract between two business entities. It details the processes that both parties must undergo to accomplish a specific business goal.

The three primary reasons why businesses create joint ventures is to pool resources, save on expenses, and combine expertise. Joint ventures can benefit by pooling their resources to fulfill their project goals. There are companies that may have good manufacturing processes, while other companies may have several networks for distribution. Also, joint ventures can save on their expenses by increasing production at a cheap cost or by sharing the costs for labor and advertising. Moreover, joint ventures can unite and share their expertise and skill sets.

Things to Avoid to Be Successful in A Joint Venture

According to a 2014 article published by Entrepreneur, the percentage of joint venture failures range from 40% to 70%, but a 2017 article published by Forbes reports otherwise. For several years, companies have regarded joint ventures as a tool that is unsuccessful in expanding a business. In a research study conducted by Bain and Company, the worth of joint ventures increased yearly by 20% from the years 1995 to 2015. Furthermore, in one survey, 80% out of 253 companies claim that joint venture deals met their expectations.

Joint ventures that succeed do offer great rewards to businessmen, but undertakings that fail can cost entrepreneurs large amounts of money and time. For that reason, companies must be aware of the things to avoid when involving themselves in this type of arrangement.

Capital drain. There are joint ventures that drain their capital quicker than expected because of failure to plan ahead. This may result in a difficulty in finding ways to add more capital and decide rushly on a loan to increase funds. Therefore, it is wise for joint venturers to plan on where to gain more capital in case needed. A contract may express that both parties apply for a loan from a third-party or from a partner.Desire for control. Joint accounts may fail because of partners who desire to control the whole undertaking and want to decide independently on how the venture should be run. This may cause disagreements that impacts the relationship of both parties and result in a resolve to stop working together. Venturers must expect conflicts in their partnerships. Partners must nominate the board of directors on each side of the party to decide on how the venture will operate. The contract must contain provisions concerning this issue.Lust for assets. A businessman who owns a small company may agree with a large company to have more board members in return for a huge capital contribution. On the part of the small business, it may lose authority in taking part of major decisions the venture may take. Joint ventures must value their assets appropriately and share them equally. These assets may include capital, intellectual property, or equipment.Close-mindedness. Most businessmen are proud of their own business cultures. So, when two different cultures combine, close-mindedness may lead to disagreements concerning what methods to use. One party may have a more advanced manufacturing process, but staff members from the other party may insist on using the old way. For that reason, both parties of the venture should discuss ahead of time how they are going to manage cultural differences.Greediness. It is normal for entrepreneurs to expect gains from their joint venture, yet it is not that easy to distribute profits. Most likely, the companies will make a priority list on where to first distribute their profits. The profit may be used for paying a loan or for another investment. A joint venture contract must spell out when and how the companies will distribute their profits.Competition. As we have discussed, joint ventures involve two business entities that operate as one to realize a specific project proposal. So, if partners involved in a joint venture compete with one another, it will lead to conflict and mistrust. Therefore, a joint venture agreement must set boundaries concerning confidentiality. Also, the contract should decide how both partners will operate in a way that avoids any conflict.Lack of planning. At the beginning stages of a business venture, partners may overlook planning for an exit strategy. So, what will happen if one entity breaches the contract? What if one party is not satisfied with the outcome of the arrangement and decides to leave? That is why partners must, from the initial phase of the arrangement, think of all possibilities that may end a joint venture. The agreement must spell out the conditions and terms for some possible scenarios to resolve disputes that may arise later on.


How to Establish a Joint Venture Arrangement

Before you establish a joint venture, you must first know if you are ready to be involved in one. Once you have made a decision, you can follow the steps below.

Step 1: Make a Scheme of the Whole Process

A joint venture is still a business, so it involves making a business plan. Creating a scheme will help you set your goals, prepare your contributions, and define what your partner should be. This is when you lay out your expectations in a joint venture arrangement. This is an important step to follow before you try looking for a business partner. Without a plan, there is nothing to discuss about.

Step 2: Choose Your Partner

The first thing you need to do before choosing your partner is to know the kind of partner your project needs. So, this depends on what your business goal is. Do you want to expand your market? Does your scheme demand more supplies? Do you plan on working with a small company? For that reason, defining your goals must be first before you search for the right partner.

Next is to identify your prospective partners. You must set the amount of contribution every partner must offer and the reason behind the proposal. You must review your list of customers, suppliers, and other small businesses you have labored with before. This will be easier since you had past dealings with them, and most likely, they will approve your proposal. Also, adjusting with them will be smoother.

Last is to make an assessment tool that will evaluate your partner before you both sign the agreement. You can simply create questions that he/she must honestly answer. You can also ask for their financial statements to be sure of the company’s capability.

Step 3: Construct a Joint Venture Contract

Creating a joint venture agreement is essential to make the plan operate. A basic contract should contain the following details: (1) Goals. Both parties must have the same objectives. This ensures that they have similar goals to accomplish. (2) Contributions. A joint venture contract must set the specific contributions each party has to offer. Issues about money can create conflict. Therefore, this part of the agreement must be clear. (3) Intellectual Property. The agreement must detail how both parties will use intellectual properties, especially when they belong to the other party. (4) Management. This is another section of the agreement that should detail who has the right to control over a particular issue. (5) Conditions for termination. Detail the conditions that may lead to contract termination.

Step 4: Make Your Partnership Work

Running a new business will be easier when both parties communicate well. Also, you should assess the rate of success of your joint contract through a performance scale or an inspection. Moreover, you must be aware of the reality that there will be a time for adjusting before both parties can perfectly work together. Having this reality in mind will be a reason for continuing with the plan even if small issues arise.


How much authority will each company have over a joint venture?

This completely depends on the written agreements. When a new company is created, the agreement will normally include details concerning the parties’ rights to designate board members. Most often, partners in a joint venture agree to each have veto rights.

How do companies get profit from a joint venture?

Usually, joint venture companies distribute profits through dividends, which mainly depends on the business’ current cash flow. In partnerships, partners directly collect a fair share of profits according to what is written in a partnership contract. The partnership contract must specify what payment co-owners can benefit from out of the partnership.

Who will be liable if the joint venture becomes bankrupt?

If the new company is a limited liability company, typically a shareholder will not be completely liable for the debt. The liability depends on the amount of money a shareholder agrees to pay in a joint venture. If a shareholder has guaranteed the company’s debts, then he/she will be liable for them. If the new company is a partnership, the liability will depend on how the venture became insolvent.

What is the most practical way to set up a joint venture?

The most common way of setting up a joint venture company is to form a limited liability company. The main advantage of this is to protect both parties from liability in case the undertaking becomes insolvent. As we have mentioned earlier, the liability depends on what shareholders agree to pay for their shares in the agreement. However, there are still tax consequences when one or both parties transfer major assets into the deal. Another way is to create a limited liability partnership because this structure may lessen a company’s tax liability. If a company doesn’t need to be part of the management in a joint venture, it is best to utilize contractual deals instead of establishing another business entity.

What is a joint development agreement?

A joint development agreement is a contract between two or more individuals who are working as one to develop a new technology or product. The parties involved usually negotiate before or even during the starting point of the relationship. Note that intellectual property is a big issue when it comes to this type of deal. Therefore, the contract should be clear about ownership.

A joint venture contract may only be temporary, but its main purpose is to increase a business’s profit. In our example earlier, Sony Ericsson started in 2002 and ended in 2011, with its peak sales in 2007. Several years later, SONY became the sole owner of the joint venture. Both companies reached and profited millions from their partnership because they decided to sign a joint venture agreement.