Joint Venture (JV)

A joint venture (JV) is a business arrangement between two or more parties. These parties are coming together and pooling their resources to complete a specific task. The parties have joint ownership and therefore share costs, losses, and profits.  

The purpose of a joint venture is to attain a competitive edge while minimizing risk. This is achieved by combining strengths and pooling resources. The parties sign a joint venture (JV) agreement that establishes the partners' rights, obligations, initial contribution, objectives, day-to-day operations, and profit-sharing ratio.

• A joint venture (JV) is a temporary legal association of two or more individuals or organizations to attain a particular objective.
• The collaborating parties contribute their resources (including financial, technical, material, and human resources) to enter a Joint Venture.
• Joint Venture (JV) Agreement: The parties mutually discuss and agree to the terms and conditions. The collaboration has a specific tenure and automatically terminates after the purpose of its formation is fulfilled.

A joint venture (JV) is formed when two or more business entities come together to achieve a common purpose. The idea of the JV is to combine the strengths of each unit. Also, together the weaknesses get subsided. Sometimes, the parties under a JV form a new business entity altogether. In that case, they call it partnerships, corporations, or limited liability companies. If not, these associating business entities keep their existing identities and go for a JV agreement. 

In a joint venture, partners share resources, assets, and equity. In most cases, the joint venture is initiated to achieve a single purpose like research or production of a certain product. But it can also be formed for an ongoing objective. Since a joint venture is a temporary arrangement, the companies are not bound beyond the stipulated period. The specific duration of collaboration is predetermined upon mutual agreement.  

#1 - General Motors and Ventec Life Systems 

Washington-based company Ventec Life Systems and the world-renowned General Motors entered a joint venture agreement. The companies collaborated to increase the availability of multi-functional ventilators across America to aid the Covid-19 battle.

The collaborative venture developed a production facility in Indiana. In the first month, the facility delivered 30000 units of VOCSN (Ventilator, Oxygen Concentrator, Cough Assist, Suction Pump, Nebulizer) to the US Department of Health and Human Services. Ventec ramped up monthly production from 150 ventilators to 10000 VOCSNs.

#2 - SAS and Microsoft

Microsoft Azure and SAS AI Analytics entered a joint venture in February 2020. The collaboration developed an emergency response system for crisis management. This comprehensive technology-based solution was designed for disaster management response. The system can be used during natural disasters like floods, hurricanes, etc.

SAS efficiently forecasts hazards using historical and real-time data. Further, it used Microsoft's technology to automate the various manual public services in disaster-prone areas to strengthen communication.  

A joint venture (JV) agreement includes the following:

• Venture Name
• Name of the Parties
• Place and Address of Business
• Duration of Term
• Purpose
• Partners’ Capital Contribution
• Management
• Interest and Profit-Sharing Percentage
• Asset Valuation
• Tax Allocation
• Confidentiality
• Terms and Conditions
• Exclusivity
• Fiscal Year
• Nominees
• Termination of JV
• Default Terms
• Meetings
• Amendments

JV Agreements can be drafted using standard templates.

Following are the different types of joint ventures (JV) classified according to their purposes:

1. Project-based JV: These are formed for accomplishing a particular project. It could be the construction of a dam, road, bridge, or completion of a research project.
2. Vertical JV: It is a collaboration between companies operating at different levels of a supply chain to attain economies of scale. These companies sell the same products or services.
3. Horizontal JV: This association occurs between two or more parties operational in the same product line. It is a collaboration among competitors.  
4. Functional JV: Such a joint venture aims to exchange resources and synergy. In doing so, it benefits all the collaborating parties.
5. Limited Co-operation: In this JV, the co-ventures get along for a fixed contractual term to perform a particular task. This could be for advertising and marketing an innovative product.
6. Separate JV: Here, the parties form a new business entity to continue the joint venture. The co-ventures become corporate partners in the new company, each holding a percentage of shares.

Whenever two or more parties associate, they aim to derive some benefit from such a collaboration; let us now discuss some of these advantages of a joint venture (JV):

• Facilitates Market Penetration: For many companies, joint ventures are a medium of entering a new market, say a foreign market.  
• Access to Advanced Resources: Joint venture organizations share their resources to reap maximum benefit and ensure cohesive growth. The resources could be financial, material, technical, or personnel.
• Shared Risks and Costs: In a joint venture, the collaborating parties bear the risks and costs as per the agreement. As a result, the liability gets distributed.
• Builds Business Relationship: Though joint ventures are temporary arrangements, it does result in a long-term relationship between firms.  
• Economies of Scale: This is another significant advantage of entering a joint venture. Since the resources multiply, production is ramped up, and the cost of manufacturing reduces.
• Improves Profitability: A JV uplifts the potential of the collaboration. As the business efficiency increases, sales and profit rise.
• Restricts Entry of New Firms: When existing business entities come together, the product prices become competitive. This further limits the scope for new entrants.

Some of the most common Joint Venture (JV) limitations are as follows:

• Resource Mismatch: In a joint venture, there are possibilities that both the firms aren’t equally competent. Hence, while one party reaps higher benefits by contributing less, the other remains dissatisfied despite pooling maximum resources.
• No Equal Involvement: Often, two or more parties within the joint venture play a small role. This can potentially lead to discrepancies and conflicts.
• Different Cultures: Since two or more individuals or companies come together, cultural clashes and disagreements do occur. It is not always possible for different styles to work together.
• Lack of Communication: There can be multiple barriers like language, demographics, distance, or a difference of opinion causing poor communication.

A joint venture (JV) is a temporary collaboration of individuals or companies for the accomplishment of a particular task. On the other hand, a partnership is a long-term association between individuals for producing goods or services. JV parties sign a JV Agreement, whereas long-term partners draft a mutually accepted partnership deed or contract.

A Joint Venture (JV) terminates after the specific duration or task completion. On the contrary, a partnership lasts longer for the entirety of the business's life span. All JV parties are liable in case of an offense or violation. But in a partnership, only the partner at fault is held responsible for wrongdoing.

This article has been a guide to Joint Ventures (JV) and its Meaning. Here we discuss joint venture types, agreement, and how it works using examples. You may also look at the following articles to learn more about M&A.

• Successful M&A
• Synergies in M&A
• M&A Process
• Horizontal Integration