Joint venture agreements refer to the kind of partnerships built when two companies decide to merge and work towards a common business objective. These relationships may be long-term or short-term, and it is just like running any other business. Below we talk about a joint venture agreement, its benefits, and some reasons why companies choose to form these agreements.
Did you know? Research suggests that joint partnerships that evolve over time and restructure together tend to show better financial returns and are an important source of innovation for companies.
What is Joint Venture Agreement?
Joint Venture Agreement is a type of contract or contractual agreement that two business entities sign up for to achieve a mutual goal. It is temporary by nature and lays down the terms and conditions of obligations for both parties. Joint ventures can make market access easier for businesses and enable them to reach a wider target audience through inward investments. Each holding can vary substantially in size, and all lines for effective business decision-making get established by the management. Joint venture agreements also cover include board and management structure, capital and equity management, legal compliance and financial rights, partnership and distribution rights, etc.
Types of Joint Ventures
The main types of joint venture agreements are:
A contractual agreement is when two business entities enter into a joint partnership agreement for the purpose of achieving mutual business objectives. Each party keeps its own accounting records separate and does not pool its profits or losses together. There are no requirements for registration, and business entities continue to operate individually. The agreement can be cancelled or terminated at any point in time if either party decides to stop collaborating on the business project.
General partnership joint ventures are established mostly in the real estate industry. Partners agree to share in their profits and loss in this type of agreement, and they are liable for each others' obligations as well.
Some of the reasons why businesses enter joint ventures are-
- Easier access to larger markets.
- To share resources and achieve their funding goals.
- Improve revenue growth.
- To diversify and develop their products further.
Items in a Joint Venture (JV) Agreement
The following items are usually included in a JV agreement:
- Type of joint venture
- Details of the joint venture such as business location, address, name, purpose, valuation, etc.
- Start and end dates of the agreement
- Legal terms and conditions
- Key contributors and list of venture members
- Obligations for each party and responsibilities of all members of the agreement
- Clauses on conflicts, management, distribution, non-compliance, confidentiality, and dispute resolution
Examples of Joint Venture Agreements
We've got plenty for you if you are looking for a good JV agreement example. Here's a list of the top ones.
1. Molson Coors and SABMiller
Two brewing companies in 2007 entered a joint venture agreement to distribute beers throughout the United States and Puerto Rico. The venture ended up saving up to $500 million yearly from the deal by the 3rd year and profited.
2. Microsoft and General Electric
General Electric announced the release of its new innovation Caradigm in the healthcare IT sector. The brand said it entered into a joint venture agreement with Microsoft Corp to enable better real-time healthcare systems for patients and enhance their overall experience. The final agreement was completed on June 1, 2012, and the joint venture was established.
3. UBER and Volvo
UBER and Volvo formed a joint venture in 2015 to ramp up the production of autonomous or driverless vehicles. The goal of the strategic collaboration was to improve driver safety, add self-driving cars, and implement reliable backup systems for their steering and brake features. The business valuation exceeded $350 million dollars after they made the merger, with an ownership ratio of 50-50 for the joint venture.
4. SONY and Ericson
Sony and Ericson signed up for a joint venture deal to increase the production of the latest smartphones and electronic gadgets. The two companies signed a memorandum as part of the agreement, and the combined annual sales achieved by both businesses totalled USD 7.2 billion in one year.
Pros of Joint Venture Agreements
A joint venture can help businesses grow faster, be more productive, and generate additional revenue without compromising on business efficiency or budget. Here is a list of the pros when it comes to signing up for joint venture agreements:
1. Shared Investments
Each business entity can contribute a certain amount of capital to the business project, thus helping them cut down on costs. A joint venture can reduce the financial burden of each company and streamline the allocation of business resources.
2. Greater Technical Expertise
Both parties fill up gaps in technical acumen, and the foundation is strong. Businesses can move aggressively towards their plans and make bold moves in the market since they work together and have specialised knowledge.
3. Enhanced Market Penetration
Companies don't have to spend extra funds on revamping their inventory or in-house assets. This is because when they sign up for a joint venture, they gain access to additional resources which cover their additional business requirements. A large firm with adequate capital can contribute some of its finances to a company that lacks financing options but can provide them with the appropriate technology solutions, products, or services. Depending on the size of the business, a partner can also provide access to better clientele.
4. Synergy Advantages
Joint ventures offer synergy benefits similar to other partnerships businesses enter. For example, businesses can work together to improve their operational efficiency or lower the cost of capital acquisition through mergers.
5. Better Credibility
Some companies lack credibility in the market since they are new. When they enter a joint venture agreement, this gets sorted. Partnering with a large, well-established brand can improve their visibility and image and give them better positioning in the industry as an organisation.
6. Different Geographic Locations
A joint venture doesn't have to be based on the same geographic location; companies can be far apart and work together from a distance. They can diversify product lines, enter into new customer relationships, and get more work done.
Cons of Joint Venture Agreements
Although there are several upsides to establishing joint ventures, there are downsides to forming these agreements as well. Here is a list of the cons when it comes to entering joint venture agreements:
1. Different Objectives
A partner may set out to have different business objectives from the ones they initially proposed during the joint venture agreement. This is a huge risk, and when two parties are in disagreement, it can offset collaborative business operations. If two companies end on a poor note, they may leak their trade secrets if the deal doesn't work out.
2. Poor Integration
Poor integration is a real problem in joint ventures, and this is due to cultural or vision mismatches. For example, when two companies have a different corporate culture, they're unlikely to get along well with each other in the workplace.
3. Imbalance in Expertise
One entity may feel that it is contributing too much to the joint venture agreement and overdoing its share. It's important to discuss how resources are shared along with the distribution of profits. Clear communication is critical to success, and each party must understand what it can and can't do to follow the agreement. Risks and rewards of the venture are also shared between the two companies, which must be communicated.
4. Changes in Market Conditions
Changes in market conditions may sometimes lead to joint ventures being dissolved quickly. This is unpredictable but a part of doing business together. A shift in economic policies or market downturns may be inevitable. A contract can also be terminated at any point in time with no explanation needed by either party.
Now that you know what is a joint venture, its pros and cons, and why companies sign up for joint venture agreements, you can make an informed decision about establishing new businesses. It has its advantages and disadvantages. They can be short or long-term and between companies from different domains. They could be between large and small companies. It all comes down to both parties requirements. So remember, Joint ventures mutually benefit parties provided they are planned right.
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