What is a Joint Venture?

What is a joint venture?

A joint venture is an arrangement between businesses in which the parties pool their resources to achieve a common goal. That goal may be a one-off project or an ongoing task. This means that a joint venture can be time-limited or ongoing. It can be run between companies in different spheres or between companies that would normally be competitors.

Examples of joint ventures

There are many examples of real-world businesses that became joint venturers. In some cases, these joint venture agreements have become extremely successful. Below are some of the most famous ones.

Alphabet and GlaxoSmithKlein

Alphabet is Google’s parent company. GlaxoSmithKlein is one of the world’s most famous pharmaceutical companies. The two industry behemoths decided to pool their combined research and development resources to create bioelectric medicines.

BMW and Brilliance Auto Group

BMW needed a Chinese partner to manufacture cars in China due to local laws at the time. It therefore joined forces with the Brilliance Auto Group to create BMW Brilliance. This gave both companies access to a new market neither could have reached on its own: for BMW it was China, for Brilliance Auto Group it was prestige car buyers.

Joint venture versus other options

The main alternatives to joint ventures are partnerships and consortiums. Although a joint venture is often referred to as a partnership, there is a significant legal difference between the two structures.

In a joint venture, two or more companies agree to work together. They may form a separate, co-owned company as a vehicle to do so, but the venturers themselves will retain separate unless there is a formal merger. In a partnership, by contrast, the two companies become and operate as one.

In a consortium, the participating companies only tend to have very loose bonds, and this consortium is unlikely to be the ideal structure for pursuing specific goals. It is better suited to being a way to progress a sector in general. For example, industry stakeholders may form a consortium to progress matters of common interest (e.g. security).

Advantages of a joint venture

A joint venture should enable the companies involved to reach goals they would not otherwise have been able to achieve on their own. Ultimately, this makes the joint venturers more profitable, either by increasing their reach, reducing their costs or a combination of both.

Disadvantages of a joint venture

The potential disadvantages of a joint venture are exactly what you’d expect given its nature. An organisation, even a small one, can be very complex. When you increase the number of organisations involved in an undertaking, you increase its complexity, so this needs to be managed carefully.

Firstly, there needs to be a robust joint venture agreement in place, which functions rather like an operating agreement in a limited company. It should set out the purpose of the venture and its duration, along with the contractual rights and responsibilities of each of the venturers (individually and together). Secondly, there needs to be clear good faith between the venturers even if they are competitors.

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