A joint venture involves two or more independent businesses working together on a single project, with each business sharing the profits and losses, if applicable, in a predetermined manner. The joint venture approach can be just as effective for small businesses as it is for larger multinational corporations. By pooling resources, the combined businesses can undertake larger, more costly projects than either could handle if they were operating independently.

Potential merger partners could include competitors, customers, suppliers, and distributors. Because working as a joint venture is in effect working with a partner, it is important to clarify the role and responsibility of each member of the venture.

Also, like partnerships, part of establishing the arrangement is determining in advance what will happen when the arrangement is terminated.

What Is a Joint Venture?

A joint venture is a partnership typically formed to undertake a particular business transaction or specific project. Like a common law relationship, there is neither the expectation nor the obligation that the arrangement will continue indefinitely.

In practice, joint ventures are much like partnerships. Their major benefits are based on a pooling of resources to generate a profit. Unlike partnerships, joint ventures are normally wound up on completion of the purpose for which they were established. In today’s global marketplace, international joint ventures are as common as partnerships in local communities. Multinational organizations such as General Electric, Olivetti, and Samsung enter into partnerships with other businesses to pursue new business opportunities. In many cases, these opportunities are too large for one party to undertake alone or they are located in unfamiliar or developing markets. The pooling of the resources of one or more venture partners can make the project more viable. Similarly, participation with a local partner can ease the entry into an unfamiliar or developing market.

Building Block

Similar to referring, subcontracting, and hiring employees, joint ventures represent an approach to expanding your ability to meet your customers’needs. Also like the other approaches— particularly hiring an employee—this strategy will have a major effect on how you do things.

What a Joint Venture Does for Its Members

There are many potential benefits to be gained from participating in a joint venture. These benefits include the following:

1. Sales and marketing. You may wish to achieve direct contact with potential customers, but not know how best to reach them. By entering into a joint venture with another business already in the market, you can rely on the expertise of the business to establish contact with your potential customers.

2. Operations. You may seek to bridge a regional gap and to gain access to familiarity with another region’s labour and business practices. Although we have ten provinces and three territories in Canada, we also have at least six distinct regions: British Columbia, the West, the North, Ontario, Quebec, and the Maritimes. Doing business within a region may be different than doing business within a province or territory. For example, the traditional British environment of Victoria contrasts with the upscale feel of downtown Vancouver and even more so with the communities in northern B.C. Joint ventures with compatible businesses in those areas might achieve better results in reaching these communities.

3. Financial. You may seek additional capital for the venture, or you may wish to share its investment risk with another. But if all you need is money, it might be better to seek the additional capital through debt or equity financing. A joint venture allows you to obtain more than additional funding: You will also have access to the partner’s knowledge, expertise, and network of contacts. And you know that they will be committed to the project.

4. Research and development. Your product or service may require adaptation to a local market, or the market’s manufacturing needs may dictate the acquisition of a local supplier. Who better to help you with this than a business already in the local market?

Locating Venture Partners

Among the more likely partners are competitors, customers, suppliers, and distributors.

Hot Tip

In a joint venture, it is usually better if your partner’s interests complement rather than duplicate yours. This will likely provide more synergyand less disagreement.

Competitors . This may assure you of getting a partner that understands your business. However, such a joint venture may carry inherent conflicts on such matters as whose goods and services have priority in terms of marketing, sales, and distribution and how new products are developed.

Customers . Satisfied customers are one of the most valuable assets any business can have. When looking for a venture partner, consider your customer base: Many of them would be ideal. You already have a relationship with them, and they know you and the goods or services that you provide. Assuming that they are pleased with how you have served them, who better to help you expand your business?

Suppliers . A joint venture with a supplier may assure your company of a source of supply and your partner a market.

Distributors . Teaming up with a local distributor may guarantee access to established routes of distribution.

Maintaining a Joint Venture

To ensure that your joint venture operates successfully, clarify your role and that of your partner before you do anything else. Along with the partnership issues outlined in Chapter 5, here are some other issues that you must resolve:

1. What will be each party’s percentage ownership and the nature of its contribution? If it is not all in cash, how is the contribution to be valued?

2. What licenses will each party grant the joint venture to its technology and trade-marks? In what territories may they be used, and for what royalties?

3. Who will be responsible for the management and control of the joint venture? How will disagreements be handled?

4. What decisions will require approval by both parties; for example, borrowing, development, manufacture and sale of new products, territorial expansion, dividends, hiring and firing of employees?

Entrepreneur Beware

Do not provide too much information to joint venture partners. Provide only as much information as is necessary to ensure that the joint venture works. Do not provide confidential management or financial information.

5. How will profits and losses be shared?

6. Will the partners’ liability be limited to debts of the joint venture and not to the partners’ other debts?

7. Will one partner’s liability for a co-partner’s wrongdoing be limited to joint venture activities only. Will it be clear that partners will not be held jointly and sever-ally liable for a co-partner’s wrongdoing or tortious act (for example, the misapplication of another person’s money or property) outside of the joint venture?

8. How long is the joint venture to last?

Will it be clearly stated that partners cannot transfer interest without the consent of the other partner (non-transferability)?

Ending a Joint Venture

Joint ventures inevitably terminate. Most are anticipated to be short-term undertakings to be wound up when they have achieved their original purpose. In Margaret’s case, described in the previous Shop Talk boxes, the joint venture will be wound up when the sweaters have been sold.

Building Block

The best way to ensure that both parties will agree upon an exit procedure is to set it out in writing in the original agreement.

Other joint ventures might be terminated because of a change in owners, parties failing to fulfill their obligations, or changing economic and political conditions that reduce the viability of the undertaking.

There are only three basic ways to end a joint venture: a buyout, sale to a third party, or dissolution.

One Party May Buy the Other Out

With a restriction on the sale or transfer of a share, if your partner wants out, realistically you are the only possible purchaser of the share. Knowing this, your partner’s offer to sell will not be generous. To avoid this scenario, make sure that your agreement contains a formula for determining the value of the joint venture for purposes of one partner buying out the other.

One or Both Parties May Sell to a Third Party

The same valuation formula that applied to the transfer of shares between partners should apply if both shares are to be sold to a third party. Note, however, that third parties are not bound by this valuation. It is little more than an agreement about your asking price. The real market value of your joint venture is the amount that a willing seller—you and your partner—will accept and a willing buyer—a third party—will pay. Because this price is determined though negotiations between buyer and seller, this price may or may not have any relationship to your valuation. But at least your valuation gives you a starting point in your negotiations.

The Parties May Agree to Dissolve the Venture

In following this approach, the normal provisions of winding up a business apply. These provisions are detailed in Chapter 28.

Like living common law, a joint venture is not intended to be a permanent arrangement. If a common law relationship proves beneficial, the parties might consider a legal marriage. If the joint venture proves successful, the parties might consider a merger, which is discussed in the next chapter.

The Least You Need to Know

A joint venture involves two or more businesses working together on a single project.

Joint ventures enable their members to offer their customers more resources than they could if working independently.

Like partnership agreements, joint venture agreements should clarify the role of each party and also determine what happens when the venture is terminated.