Humans are social creatures, seemingly designed to work together to achieve goals and find fulfillment. As the Beatles sang, “I get by with a little help from my friends.” We often find what we cannot necessarily accomplish on our own, we can accomplish through collaboration and cooperation with others.
In the business world, one form of collaboration that can potentially be beneficial for both/all parties involved is the joint venture. Keep reading to learn more about exactly what a joint venture entails and when it may or may not make sense for your company.
What Is a Joint Venture Company?
Although pursuing a joint venture does involve working with others, it’s not always the same as a partnership. A joint venture involves an agreement between two or more parties to work together to achieve a specific business objective.
The key word here is specific; rather than being an open-ended partnership, this strategy involves parties completing a specific project together. That being said, the undertaking can be brief or stretch out over months or years — so joint ventures are not necessarily short, but rather are centered around a specific purpose.
As one expert writes for NerdWallet, a joint venture limits the legal responsibilities of each party to the specific, agreed-upon goal. The collaborators are independent but share certain specific risks and benefits related to the project around which they have entered into the joint venture relationship. This allows individuals or companies to work together without having to fully merge.
Logistically speaking, there are actually two different ways to pursue a joint venture. As The Balance Small Business writes, you can either create a distinct, new entity or simply come to an agreement between two or more existing companies without forging a new one.
When a Joint Venture Makes Sense… and When It Doesn’t
At the heart of any joint venture is the understanding that each party must contribute something — resulting in a working relationship stronger than the individual entities on their own. Business funding is one important contribution — it can be split equally between participants or supplied by one side, depending on the arrangement. If one joint venture partner puts up the funding to meet the goal, another may offer up equipment, employees, or expertise.
This means a joint venture tends to make the most sense if your business needs to eliminate barriers toward achieving a goal — like insufficient funds, technology, personnel, etc. to achieve a goal — while also having something to offer to the partnership.
Think critically about what each party can bring to the table. Do the potential benefits justify the potential risks? For instance, entering into a joint venture with an international company could help your business expand its reach around the globe. However, if the joint effort ends up falling short of revenue targets in foreign markets, your company will shoulder a percentage of the losses.
Joint ventures also tend to have a better chance of success when parties offer complementary skills. What Company A has, Company B needs — and vice versa. Think twice about joint partnerships between entities with too much overlap, as this may become a breeding ground for competition and power struggles.
If you’ve heard the saying, “You scratch my back, I scratch yours,” then you’re already familiar with the underlying principle behind joint ventures. What may be impossible for your company to achieve in a reasonable timeline alone may be highly possible with contributions from another entity. Just be sure you are able to hold up your end of the bargain and negotiate for favorable terms up front so the joint venture can go smoothly.