Joint Venture

A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. Each entity contributes assets to the joint venture and agrees on how to divide up income and expenses.

There are four main reasons why companies form joint ventures:

• Leverage Resources: A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.
• Cost Savings: By using economies of scale, both companies in the JV can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technology advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising or labor costs.
• Combined Expertise: Two companies or parties forming a joint venture might each have unique backgrounds, skillsets, and expertise. When combined through a JV, each company can benefit from the other's expertise and talent within their company. Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners' rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits, and the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.
• Enter Foreign Markets: Another common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.