What Are the Different Types of Joint Ventures?

What you need to know about joint ventures.

Dec 5, 2015 at 12:04AM

A joint venture is something that happens when two or more businesses partner with each other to pool their resources and work together toward a common aim. It could be a joint advertising campaign, a research and development project, or even to start an entirely new business. Each partner in the venture contributes some value to the partnership and shares in both the risk and reward of the project.

All the companies could contribute cash, or perhaps one company could provide cash while the others provide personnel, expertise, technology, or other resources. The possibilities are limitless; in each joint venture, all of the partners negotiate what each will contribute and how the risk and reward will be split up front.

Why participate in a joint venture?
The logic behind most joint ventures is straightforward. For each joint venture, the companies involved assess that the likelihood of success is greater or more profitable working together instead of going it alone.

For example, one company could be low on cash but possess specialized intellectual property for a new, innovative technology. Another company may have plenty of cash, but lack that technical capability. Together, these two companies could complement each other to progress the technology. The cash rich company could fund an R&D project to expand the other company's technology, and in exchange gain a license to commercialize the technology under their brand.

Other examples of joint venture can include agreements to jointly buy inventory from suppliers to achieve higher scale and lower costs. Companies can agree to bundle complimentary products together and offer customers a more comprehensive offering. In other cases, companies can form joint ventures of such interconnectedness that the result is not that much different than an actual merger.

Joint ventures are not without risk
Any time two entities join in a partnership, there is a risk that one or more of the participants could become dissatisfied with the arrangement. It could stem from one partner not living up to the expectations originally agreed to, or it could that one company unexpectedly benefits far more than the others.

In the example from above, it could be that the joint research and development project fails to produce any meaningful innovation in the technology. The company that contributed the cash still makes out with an acceptable benefit -- they gained access to the original technology they wanted -- but the other company essentially gains nothing.

The key to mitigating these risks is to plan for as many eventualities as possible up front and include a plan for each in the original agreement. In many cases, this is a very challenging part of the process simply because its impossible to predict how the joint venture will work out, particularly in speculative ventures like R&D. In more straightforward ventures like joint marketing or production scenarios, the outcomes can be more easily predicted and planned for.

The strategic benefits of a well-designed joint venture can be huge. However, there are risks in every deal. Each company involved should make sure to perform the necessary due diligence to give the venture the best chance of success for everyone involved.

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