Your Guide to a Joint Venture Agreement
Joint ventures happen when two parties work together for a single purpose. Let’s say you have some amazing idea that you know would do well for a fantastic niche somewhere, but you have no clue how to get it off the ground. That’s when you get involved with someone else in a joint venture who does have the resources to make your vision a reality. Utilize their knowledge in a way to get the project started, and you’ll both reap the benefits. Of course, it’s not all roses and unicorns unless you plan the agreement well and then execute what was planned. To do all of that, you need a solid understanding of what the agreements will do and what joint ventures can entail. What Is a Joint Venture Agreement? A joint venture agreement is documentation that is used when multiple businesses work together on a temporary basis to achieve a goal. The key takeaway from this type of agreement is that it is entirely temporary. That means that there is no legal entity or corporation that is created as a result of a joint venture. Each participating entity is responsible for keeping up with their own individual records regarding what the venture is about. Different Types of Joint Ventures There are two types of joint ventures – the contractual and the general partnership. They are different from one another in the way they actually work. Both allow multiple companies to work together, but the approaches vary. Contractual joint ventures happen when at least two parties have agreed to work together on a project, but they don’t share the profits and losses cumulatively. In other words, each party is responsible for keeping their own accounting records, and each set of records doesn’t affect the other one. In a general partnership joint venture, all parties involved share profits and losses equally, and both are liable to the same extent. These ventures are the most common when real estate is involved, and not quite so much in terms of business. Partnership vs. Joint Venture Both partnerships and joint ventures mean that you’re working with more than one company, entity, or other business. Even still, they both have a specific function when it comes to when they will be used. While there is a type of joint venture called a general partnership, it’s not the same thing as a partnership. This is an important distinction in understanding the fundamental differences between the two types of agreements. Joint ventures, in any form, are temporary. They last only as long as it takes to reach the mutual goal that all involved parties are trying to achieve. Once the goal is reached, the joint venture ends, and the agreement is over. It is the difference between Universal working with Disney to allow the Hulk to appear in the MCU movies even though Disney can’t make a Hulk movie just yet. Partnerships, on the other hand, are only formed if there is going to be a long-term, ongoing business connection between the multiple parties. What that means is that if Disney were to create a partnership with Warner Brothers Studios, not only would they be able to produce some seriously epic superhero movies, the agreement would also be for the long haul and wouldn’t end with just the first movie. How Does a Joint Venture Work? Business owners that want to grow their business and extend their market reach will typically engage in a joint venture to make that happen. They’re a great way to generate revenue more effectively. The strategic relationship that is formed allows for sharing of markets, assets, intellectual property, and profits. You can get all the benefits from a merger without actually merging with another company. Instead, each party is responsible for themselves. Execution of the joint venture agreement is where you’ll find out if the alliance is going to work. How well it functions is largely dependent on the type of relationship you forge, as well as the details of how it is expected to function. To begin to understand how joint ventures work, you need to understand how mergers work. In a merger, you need documentation that provides a fully detailed plan to make the merger successful. A joint venture agreement is paramount to executing a joint venture. To create an agreement that is going to work well, there is much to consider. You need to think about what your goals are when going forward with this joint venture. Are you interested in increasing profits or sharing and expanding research and development for your product? Is one of your goals to improve your market reach? What about developing and improving technology? These details need to be worked into the joint venture agreement, so everyone knows what the expectations are for each party involved. This is especially true for potential risks that are involved when embarking on a joint venture. Advantages of a Joint Venture There are a lot of positives to working with another company. When partaking in a joint venture, the companies can combine resources. Not only is it a great way to use resources wisely, but it’s also a great way to create a broader financial foundation to draw from. You’ll also be able to tap into each other’s skillset. You may not have the knowledge to bust through online content marketing, but the company that you’re working with may have an entire department that is dedicated to that. When you combine forces, your product becomes a force to be reckoned with. Another thing that happens when you combine resources is the way that you gain access to markets you couldn’t reach before. Your reach is therefore extended, and you can even find yourself with new distribution channels you didn’t know about before. If developed properly, a joint venture agreement can award an excellent amount of flexibility over the project from all sides involved. As long as both parties agree on the terms from the beginning, then you can exert equitable amounts of control over the entire relationship. Disadvantages of a Joint Venture While there are plenty of perks to being a part of a joint venture, there are some disadvantages you should probably think about before going forward with a project. There is something to be said about safeguarding your ideas before seeking out someone to work with. It is possible that you may end up in a situation where there is an imbalance between the parties involved. As an example, you may end up with the other party having more expertise in the project you bring to the table. As a result, that other company may end up taking over more of the project than you originally intended. You may also find that you disagree with the other company when it comes to leadership or management techniques and styles. If you can’t find common ground to work with, you might end up either suffering through the venture or giving up altogether. Unless there is a non-compete clause or something similar in the joint venture agreement that says one company can’t work on the project without the other, a disagreement like this could end badly. In order to avoid the disadvantages as much as possible, the joint venture agreement needs to be explicitly clear and go into great detail about planning, objectives, and who the people are that will be responsible for the decision-making. A Few Last Words on Joint Venture Agreements Joint venture agreements will be the backbone of a successful alliance between multiple parties that all have a common goal. There are going to be risks involved, including everything from differences in cultures to an imbalance in resources. The best way to avoid these issues and enjoy the benefits of going forward with a joint venture is to have an ironclad agreement between everyone involved. If you do, then you’ll have a positive experience when it comes to sharing resources and profits. Profits are the ultimate goal when agreeing to a joint venture, so as long as the agreement is well-written, there is a better chance of success for everyone involved. (kw: joint venture agreement)