Today, there are increasingly a number of collaborations among businesses where there is shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures mainly for the following reasons;
- To access a new market, particularly emerging markets.
- To gain scale efficiencies by combining assets and operations.
- To share risk for major investments or projects.
- To access skills and capabilities.
There has been much negative press about joint ventures, but objective data indicate that they may actually outperform wholly owned and controlled affiliates. Most joint ventures are incorporated, although some, as in the oil and gas industry, are "unincorporated" joint ventures that mimic a corporate entity. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-ventures".
The venture can be a business JV (for example, Dow Corning), a project/asset JV intended to pursue one specific project only, or a JV aimed at defining standards or serving as an "industry utility" that provides a narrow set of services to industry participants.
A JV can be brought about in the following major ways:
- Foreign investor buying an interest in a local company
- Local firm acquiring an interest in an existing foreign firm
- Both the foreign and local entrepreneurs jointly forming a new enterprise
- Together with public capital and/or bank debt.
In many Common Law countries, a joint-venture (or else a company formed by a group of individuals) must file with the appropriate authority the Memorandum of Association. It is a statutory document which informs the outside public of its existence. It may be viewed by the public at the office in which it is filed. The Articles of Association regulate the interaction between shareholders and the directors of a company. It deals with the powers relegated by the stockholders to the directors and those withheld by them, requiring the passing of ordinary resolutions, special resolutions and the holding of Extraordinary General Meetings to bring the directors' decision to bear.
A joint venture allows businesses to grow and gain access to markets or expertise beyond their existing capability. By teaming up with another company, many small businesses use joint venture agreements to share specialized expertise, such as technical skills or intellectual property, as well as spread the risks and costs of developing a new market or product.
In a joint venture (JV), two or more "parent" companies agree to share and synergize capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.
For (AIP) to help you decide what form of joint venture is best for you, you should consider whether you want to be involved in managing it as well should also think about what might happen if the venture goes wrong well as how much risk you are prepared to accept. It's worth taking advice from Anchor Intermediary Platform (AIP) legal Team to help identify your best option.
Why Joint Ventures?
Joint ventures are becoming an increasingly common way for companies to form strategic alliances because there are good business and accounting reasons to create a JV with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance.
Operating a joint venture with a foreign partner requires time, resources, and cross-cultural skills. Cultural intelligence, strategic thinking and a jointly prepared business plan can be the prescription to avoiding errors in cross-cultural projects, Hence Joint Ventures (JV);
- Provide companies with the opportunity to obtain new capacity, expertise, and information and synergize capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.
- Allow companies to offer their customer new value, new products and services
- Allow companies to save money when businesses share operating, advertising and marketing costs.
- Allow companies to save valuable time when businesses share the workload.
- Allow companies to gain new business associates and get referrals from other businesses.
- Allow companies to enter into related businesses or new geographic markets or obtain new technological knowledge.
- Have a relatively short life span (5-7 years) and therefore do not represent a long-term commitment.
IMPORTANT FACTORS TO BE CONSIDERED BEFORE A JV IS FORMED
- Screening of prospective partners.
- Looking for business synergies, matching goals, complementary distinctive capabilities and core competencies.
- Joint development of a detailed business plan and shortlisting a set of prospective partners based on their contribution to developing a business plan.
- Due diligence checking the credentials of the other party ("trust and verify" Trust the information you receive from the prospective partner, but it's good business practice to Verify the facts through interviews with third parties).
- Development of an exit strategy and terms of dissolution of the joint venture.
- Most appropriate structure (e.g., most joint ventures involving fast growing companies are structured as strategic and synergistic corporate partnerships).
- Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners.
- Special allocations of income, profit, loss or deduction to be made among the partners.
Most Common Causes of Joint Venture Failure
Unclear Leadership, Poor Process Integration, Cultural Differences
Poor Leadership
Poor or unclear leaders is another top reason of joint venture failure. Too often, joint venture partners insist on sharing a project leadership role. When the parties disagree, a standoff occurs. If the parties don’t agree from the very beginning who will have day-to-day operational control of the project and how fundamental decision will be made, the JV is bound to fail.
Cultural Differences
Culture in general is concerned with beliefs and values on the basis of which people interpret experiences and behave, individually and in groups.
Culture is the "lens" through which one views the world. It is central to what people see, how they make sense of what they see, and how they express themselves.
Insufficient Planning
Insufficient planning is also one of the most prevalent reasons for failed joint ventures. Too often, a joint venture consists of nothing more than a statement of each party intended contributions to the project and their respective share of the profits. This seldom works.
If the parties wish their joint venture to SUCCEED, they should agree to a comprehensive written plan upfront. The plan should include provisions for future contributions, logistical issues, governance of the joint venture, dispute resolution, ownership of jointly-developed assets, including intellectual property; The term and termination of the joint venture, including provisions for winding up its business.
Working together: challenges and synergy opportunities
- Different approaches to life values, principles, truth, goals and success.
- Different approaches to doing business.
- Different communication styles.
- Different attitudes towards conflict and disclosure.
- Different approaches to performance and completing tasks.
- Different approaches to taking initiative and risk-taking.
- Different approaches to leadership.
- Different decision-making styles
- Different approaches towards teamwork
- Different approaches to learning and sharing knowledge
Other Failure Reasons
Other reasons of joint venture failure include poor commitment; disagreement over operating policies, strategies, and tactics; and differences in the approach towards management style and systems.
Dissolution
The JV is not a permanent structure. It can be dissolved when:
- Aims of original venture met
- Aims of original venture not met
- Either or both parties develop new goals
- Either or both parties no longer agree with joint venture aims
- Time agreed for joint venture has expired
- Legal or financial issues
- Evolving market conditions mean that joint venture is no longer appropriate or relevant
- One party acquires the other
