What is a Joint Venture?

Published by Thomas Herold in Corporate Finance, Economics, Investments

The term 'Joint Venture' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Joint ventures are businesses or projects that two or more companies create together. They typically have shared risks and returns, ownership, and control structure. Companies form joint ventures for a primary reason. Usually they are trying to combine their various resources in order to achieve some specific goal. It could be for an existing or a new project. Each of the JV owners is ultimately liable for the losses, profits, and costs that come with it. The joint venture itself is a separate company that has different objectives from the main interests of the owning companies.

Companies form joint ventures as a means to pool their expertise in the industry, their business reputation, their technology and abilities, and their separate human resources. This gives them the advantage of combining resources on a project as they are able to share the costs, liabilities, and risks associated with the job.

Joint ventures are most often temporary partnerships between two or more companies. They draw up contracts that spell out the joint project terms for which every participant will be responsible. At the end of the joint venture, every participating party gets its shared percentage of the losses or profits. They sign an agreement that the joint venture is over and dissolve the original JV agreement. These are among the advantages for forming such joint ventures.

There are many disadvantages to these joint ventures as well. Because of these, as many as half of the JVs ever formed end with conflict in under four years’ time. Among the problems that plague joint ventures are greater liability, reduced outside opportunities, and unfair divisions of resources and work.

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Greater liability is a serious and real issue for the owners of joint ventures. Most joint ventures become set up with structures of limited liability companies or partnerships. Each of these types of business structure comes with its own liability. Only if they form a business entity that is separate can they avoid this increased liability for the JV. All participating owners equally share responsibility for any claims that are filed against the JV. This is true regardless of how much they are involved in the activity that instigated the claims.

Contracts with joint ventures also typically reduce the amount of outside opportunities for all of the companies participating. This lasts so long as the joint venture project is ongoing. There are often non-compete agreements and exclusivity arrangements made in the process. These agreements will impact their business dealings with vendors and customers alike. The idea is to keep all parties focused on the joint venture’s success and to reduce conflicts of interest between their various businesses. These limitations will end after the project concludes. In the meantime, they can negatively affect the main business and operations of the various partner companies.

Unfair divisions of resources and work are a final problem that haunts many joint ventures. The parties involved all share control and ownership. This does not mean that the employment of resources and amount of work done will be fairly divided. One company might only have to put people to work on the project while another has to provide facilities, technology, or access to distribution. This may mean a lot more work and resources are committed by the one partner.

Despite this unfair burden, the shares of the profits are the same for all contributors. It does not matter that one partner often contributes much more to the project. Such unfair distributions of work and resources often cause conflicts among the owners of the JV project. Conflicts like this can create a lower rate of success for the project in the end.

The term 'Joint Venture' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.