Creating a Joint Venture

Teamwork can really pay off. So a joint venture with another company may be an excellent opportunity to grow your own business without the complexities of making an outright purchase of another company.
 
With a joint venture you make an arrangement with another company – possibly one of your competitors – to cooperate in a way that can improve the prospects of both businesses. Of course a formal agreement needs to be negotiated that specifically documents the roles of each company and how potential profits (or losses) will be shared.
 

Why Engage in a Joint Venture?

  • Perhaps you have an established distribution channel another company could use to profitably sell its product. For example, Barnes & Noble once partnered with Starbucks to create in-house coffee shops in B&N stores.
  • You might partner with a company in another country to supply products not available in that country.
  • You might consider combining your capital with that of another company to enter new markets or fund growth. Three energy- and technology-related companies, including GE, NRG Energy and ConocoPhillips established a venture for funding smaller growth-stage companies interested in developing new, innovative energy technologies.

Advantages

There can be significant advantages in creating a joint venture, such as:
 
  • Entering related businesses that previously presented high barriers to entry.
  • Gaining access to expertise without the need to hire more staff.
  • Leveraging existing technologies and patents developed by other companies.
  • Sharing the risk of high-leverage, but uncertain ventures.
  • Establishing a presence in new, untapped markets, including international opportunities.

Disadvantages

Some pitfalls of entering into a joint venture include:
 
  • Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal.
  • Coping with differing cultures, management styles, and working relationships that prevail in each company.
  • Managing communication with senior managers and employees in both companies so there’s a consistent understanding of the objectives of the joint venture.
  • Making poor tactical decisions caused by a misunderstanding of the roles of each company.
Joint ventures can help your company grow and expand into new markets, but they can be highly complex, and require excellent relationships between the senior management teams of each partner.

Game Plan

  • Think carefully before even considering a joint venture. If you do see a possible opportunity, be sure to contact an experienced attorney and accountant for advice on structuring such an arrangement.
  • If you’re considering an international joint venture, review this report, “International Joint Ventures, a Practical Approach,” (PDF) for additional insights on structuring ventures in other countries.
  • Review this Forbes article on seven steps to take for making a joint venture a successful one.
 
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