What Is Joint Venture?
Joint venture is a business collaboration model that consists of the union of two or more companies with the objective of executing a project or creating a new company to efficiently explore some economic activity.
Joint venture partnerships are generally established for a fixed period of time, which may be short- or long-term.
In some cases, a joint venture may also be for an indefinite period , which will depend on the conditions signed in each contract.
Historically, it is an expression of English origin that can be translated as “joint venture” or “ risk union ”.
Its references refer to the Anglo-Saxon maritime navigation contracts , through which navigators came together in search of increasing profits and reducing business costs.
The cooperation model has evolved over time and has also been incorporated into the reality of railway, oil and mining companies.
It is currently adopted by small, medium and large companies, whether for a specific short-term purpose or for complex projects with an international scope .
How Does A Joint Venture Work?
A joint venture works as a shared growth accelerator , given the possibilities of reducing expenses and increasing profitability .
If well structured, it can improve the competitiveness and efficiency of participating companies by joining forces around a common objective.
Through a joint venture, companies with complementary skills can enter into a cooperative agreement and grow together.
Imagine the following example: a dairy industry in a certain state, with space in production capacity, wants to introduce its products in other regions of the country.
She can try it alone and face all challenges unaided, such as investing in infrastructure , logistics, hiring staff and competition.
Or it can form a joint venture with another company that operates in the regions where it intends to enter and that has access, for example, to points of sale .
What Is The Purpose Of The Joint Venture?
The main objective of the joint venture is mutual development .
By joining forces, two or more companies are able to grow and achieve results that, perhaps, they could not achieve individually.
A good example is the exploration of the international market .
Each country has its own set of rules , which does not always make life easier for foreign companies.
Companies that want to settle in China , for example, seek partnership agreements with a Chinese company to overcome bureaucratic and legal barriers .
Among other situations, these can be applied aiming at:
- Exploring new markets
- to risk reduction
- Sharing raw material costs
- The transfer of technology and know-how
- Overcoming international barriers
- to capitalization.
When there is an association of capital of the co-ventures (participating companies), the agreement is classified as an “equity joint venture” .
When there is no equity association, the partnership is called a “non equity joint venture” .
It is important that all aspects of the collaboration agreement, whether for the creation of a new company or not, are clearly stated in the contract.
It can happen, for example, that one of the parties enters with the capital, and the other, with the technology.
Or one to supply the product, and the other to make the distribution channels viable .
The purpose of it is to join forces, align competencies and share results.
But if the agreement is not well-tailored, it can open gaps for disagreements and turn a promising partnership into a major headache.
Joint Venture: Advantages And Disadvantages Of This Strategy
A flexible and easy-to-build tool , the joint venture offers several advantages to the development of new businesses, but there are also disadvantages.
Let’s see below:
Benefits
Among the main advantages, we can highlight:
1. Shared Risk
When two or more companies come together to create a new product/service or explore a new market, there are risks involved in the operation.
After all, there are no guarantees that the new venture will, in fact, be a success.
Therefore, risk sharing is an advantage, since any losses can be diluted between the parties, impacting less on the structure of each co-venture.
2. Shared Investment
The same principle applies to investing in the new company or new business .
Instead of paying all the contributions, one company may be responsible for the injection of financial capital , and the other, for the transfer of technology .
3. Access To New Markets
The joint venture can be useful to increase the market share of partner companies, both nationally and internationally.
Mainly in international agreements, a partner in the country of destination of the operation can facilitate the legal procedures, facilitate the logistics and capture customers more efficiently.
4. Operational Optimization
In the operational area, the joint venture also contributes to the reduction of raw material costs , investment in state-of-the-art equipment and gains in production efficiency .
In the case of industrial companies, the reduction in production costs influences, for example, operational indicators , improving results.
Disadvantages
There are also disadvantages to this business model, as highlighted below:
1. Shared Failure
Undertaking is always a risky activity, even if the business is the result of a joint venture strategy.
The new business formed by the partnership between the co-venture companies can fail and result in losses for the parties involved.
2. Conflict Between Participants
Differences in role performance, task execution and decision making can harm business performance.
Conflict between participants is one of the major causes of breaking agreements, even unilaterally.
Depending on the situation, the partnership that should have been successful ends up turning into a lawsuit , driven mainly by the party that feels aggrieved in the operation.
3. Misalignment Of Goals
The goals and objectives need to be clear and very explicit in the agreement , a document that details how the project will be implemented.
Otherwise, there may be a misalignment of goals and objectives, frustrating participants’ expectations .
4. Breach Of Trust
Each participant in a partnership agreement must act in good faith and use their best efforts to make the deal a success.
It is a strategy that requires transparency and trust.
It may happen that a member of the joint venture is only interested in taking advantage of technology or financial resources.
Unreliable partners also represent disadvantages for this type of corporate strategy.
Types Of Joint Venture
Joint ventures are divided into different classes, such as national and international, temporary or permanent, with and without financial capital sharing .
From a legal point of view, there are basically two types: contractual and corporate joint ventures.
Contractual Joint Venture
In the contractual joint venture, there is no creation of a new company, that is, there is no legal personality or corporate bonds.
It is a partnership model adopted by companies that aim for a common short/medium term objective, such as carrying out a specific undertaking .
As there is no creation of a new company, only a collaboration contract, the work is generally performed by the teams of the participating companies.
Corporate Joint Venture
In the corporate joint venture, there is the creation of a new company with its own legal personality.
This is the case of partnerships that seek long-term objectives or for indefinite periods, usually with capital contribution from the participating companies (equity joint venture).
The formation of a corporate joint venture requires even more caution regarding the roles and responsibilities of each member in the new company due to the complexity of the operation.
Example Of A Joint Venture Agreement
As there is no regulatory requirement, the joint venture agreement can be prepared and adapted according to the interests of the parties .
The purpose of the document is to give legal support to the partnership and properly formalize business collaboration.
Among the clauses that may be included in a contract of this nature, we can highlight:
- Description of the parties involved
- Details of the project or undertaking that the joint venture partnership is about
- Rights, obligations and responsibilities of the parties involved in the partnership, including towards third parties
- Details of the adopted joint venture model
- Forecast of capital investment, technical expertise or technology transfer (and by whom)
- Accountability methods
- Situations in which the partnership may be changed or terminated
- Applicable law and venue of election.
What Is The Difference Between A Consortium And A Joint Venture?
Despite the similarities, joint ventures and consortia are different, both in legal and practical terms.
From a legal point of view, the joint venture does not have specific legislation that determines how the partnership agreement must be structured.
This flexibility even makes the formation of alliances through joint ventures more practical and adaptable.
The consortium , on the other hand, even without legal personality, obeys the S/A law , with several mandatory clauses .
The other difference is in the practical aspect.
In the joint venture modality, the participating companies can enter into a contractual partnership or create a new company.
Consortia, in general, are formed by companies in the same field to participate in public tenders, collective purchases, among other specific projects.
Venture Capital Vs Joint Venture
Venture capital (venture capital), unlike a joint venture, is a venture investment aimed primarily at companies in early stages of development.
It is a common type of investment in the startup universe , in which the venture capital fund contributes resources in exchange for an equity stake in the business.
Private Equity Vs Joint Venture
Private equity (private equity or equity) is also a type of investment that resembles venture capital.
The difference is in the application of resources.
Private equity funds invest in privately held companies that already have revenues and some market share.
The investor also becomes a shareholder in the business for a time, with the aim of disinvesting at a profit once the company develops.
Joint Ventures And Mergers: Understand The Differences
Also, joint ventures should not be confused with mergers and acquisitions (M&A), or mergers and acquisitions, another common growth strategy in the corporate environment.
Merger is the operation by which two or more companies come together to form a new company that inherits all the rights and obligations of the previous ones.
A joint venture agreement may even result in a new company, but co-ventures continue to exist as their own, independent legal entities .
Is Joint Venture A Strategy For Your Business?
To answer this question, you first need to be clear about your business goals .
Do you want to explore the international market or launch new product lines to expand the mix offered to customers?
To make sense, the partner you are considering entering into a joint venture contract with needs to offer something that is beneficial to your business strategy .
It can be technology, infrastructure, know-how or financial support.
The opposite is also true: you need to offer a satisfactory return.
Remember that a partnership needs to be win-win for both parties.
As you have noticed, the joint venture is a practical and agile tool, with the potential to leverage business and improve results .
But you also need to consider the disadvantages.
After all, you will need to share responsibilities and assignments with a company different from yours, in addition to dedicating yourself to other details that will certainly require time and attention.
Before deciding to go down this path, research other ways to boost your company’s growth and do a comparison exercise.
