How to Manage Risk While Investing in Joint Ventures

A joint venture is an alliance between two or more organizations. The alliance results in a partnership that shares markets, assets, intellectual property, profits while splitting costs and risks. Unlike a merger whose deal is the transfer of ownership, it is retained by the constituent firms in a joint venture. A joint venture is between two small businesses aiming to compete with more significant firms or between two large firms. A large company can also partner with a small company to gain competitive leverage on acquiring technology, resources, or intellectual property against others.

How Does a Joint Venture Work?

Unlike a partnership, a joint venture is a temporary partnership. Individuals or businesses will come together with the primary aim of joining forces on a specific project. The real estate, technology, and media sectors are well known for joint ventures.

 

Joint ventures are a medium for two or more parties to venture into new markets, combine resources, and tap into each other’s complementary skills and strengths. The concept taps into some degree of collaboration while still operating independently. Beyond their purpose of the joint venture, parties do not have any legal responsibility to each other.

Characteristics of a joint venture include:

• Parties to the joint venture exist and operate independently except for their scope of collaboration.

• A joint venture is temporary. After the goal of the partnership is achieved, it is dissolved.

• Both parties partake in the contribution of resources, implementation of the project, and the sharing of assets and liabilities.

Terms and conditions to the temporary partnership are stipulated in a written joint venture agreement. While the written contract is not legally binding, it acts as a guiding factor to the parties’ commitments and ensures adherence to obligations. In addition, each party’s contribution, duties, rights, and profit share are specified in the agreement.

Benefits of a Joint Venture

1. A joint venture helps a business leverage its full potential, gaining a competitive advantage against its competitor. The business benefits from the economies of scale.

2. Working with a joint venture, especially inter-state or inter-nation, helps your business gain new distribution networks in addition to new markets.

3. A joint venture acts as a medium for a business to access and learn new technologies which would otherwise be impossible. Organizations need not pump additional capital to access advanced technology which their partners already have. Your private investment thus can produce more products, save and cut costs.

4. A joint venture makes it possible for businesses to spend less on production but produces quality goods. Cost of services and products are managed with a joint venture, making it possible to set an efficient price for their goods and services.

5. A joint venture links advanced marketing strategies and production technologies between local and international businesses. Organizations produce better quality goods and embrace technological ideas aimed at reducing the cost of production.

Risks of a Joint Venture

1. While a joint venture gives you access to new business opportunities, some clauses may limit your business’s external options. A joint venture agreement may stipulate against competition or affect your present working relationships with vendors or other business contacts during the term of the project.

2. A significant characteristic of a joint venture is the equal basis sharing of liability about the specific task. It might pose a disadvantage to your business if your level of involvement in the claim was minimal.

3. Conflicts may arise about the sharing of work and resources. Equal distribution of work and resources may be impossible in a joint venture. One may be tasked with providing production facilities, technology, and distribution channel, while the partner only provides personnel. While one has increased responsibilities, the profit share may not add up, leading to differences.

How to Manage the Risks of a Joint Venture

The first step to mitigation of risks is recognizing practical challenges.

1. The participating organizations may come together to file a legally separate entity. All the liabilities about the specific task are transferred to the independent entity hence cushioning the participating parties.

2. To mitigate the risk of a joint venture, you must carry out due diligence on the participating organization(s). Even after the establishment of the experience, you should regularly monitor the parties to ensure compliance.

3. Draw an anti-corruption agreement about the venture.

4. If you partner with a foreign company, check to ensure the government does not own the entitlement.

While a joint venture is temporary, a single risk may run your business to continuous legal battles. Obtain all the required tax obligation documents and permits to avoid battles with the government.