Joint venture: advantages and disadvantages

A joint venture could be the answer for start-ups that aim to develop new products or scale up but lack the expertise or resources.

Today’s businesses often collaborate with other companies on joint ventures, pooling their resources and skills to develop new products, expand into different markets, or increase operational capabilities.

By teaming up with better-known companies, many small businesses leverage joint venture agreements to gain a competitive edge in their industry.

This means they can share specialised expertise, such as technical skills or intellectual property, and spread the risks and costs of developing a new market or product.

Joint ventures are usually formed by two businesses with complementary strengths.

For example, a technology company may partner with a marketing company to bring an innovative tool to market.

International businesses can also benefit by joining forces with local distributors to sell products in the local market.

Joint ventures can dramatically increase the reach and scale of both businesses while reducing the risk, however, they aren’t without their pitfalls, and poorly conceived partnerships have the potential to harm both parties.

It pays to understand what joint ventures are, as well as their advantages and disadvantages.

What is a joint venture?

A joint venture is when two or more businesses agree to work together.

It’s essentially a commercial agreement between two or more parties, formed to achieve specific business objectives, such as launching a new venture or entering a new market.

Each business maintains its separate business structure and legal status, although they sometimes create a new, jointly-owned business that is held at arm’s length from the parent companies.

Depending on the parent companies’ needs and resources, joint ventures don’t need to be equally split – different partners can hold varying stakes.

A joint venture should provide a benefit to all parties, helping the parent companies grow, or providing additional revenue streams that would be impossible to generate without partnering with another business.

Joint ventures typically have a defined timeframe or outcome, but they can also encompass long-term partnerships.

Any number of companies or individuals can collaborate on a joint venture, and these agreements can involve all types of business structures, including sole traders and self-employed individuals, limited companies, and limited partnerships.

What is the difference between a joint venture and a partnership?

A joint venture and a partnership are both business agreements involving two or more parties, but they differ in purpose, duration, and structure.

A partnership is a type of business structure in which two or more individuals form a business with the intention of making a profit.

Partners share the profits, losses and management of the business, and each partner is personally liable for the partnership's debts.

Common types of partnerships in the UK include 'ordinary' partnerships and limited liability partnerships (LLPs).

Partnerships are typically long-term arrangements, where partners work together to run the business on an ongoing basis.

The relationship between the partners is defined by a partnership agreement.

This details how profits and losses are shared, each partner's role, dispute resolution, and how the partnership can be dissolved.

However, a joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task or project.

This could be a new project or any other business activity.

In a joint venture, each participant is responsible for profits, losses, and associated costs, but the venture itself may be its own entity which is separate from the participants' other business interests.

Unlike a partnership, a joint venture is usually established for a limited time or for a single project.

Not all joint ventures require creating a new legal entity – many are contractual agreements where each business maintains independence.

Once the project is completed, or after a specified time period, the joint venture is dissolved.

While both joint ventures and partnerships involve collaboration and shared risks, joint ventures are typically project-specific and temporary, whereas partnerships are more permanent structures involving shared management and ongoing business operations.

Why form a joint venture?

There are a number of reasons why your business might consider entering into a joint venture with other partners, including:

New product development

Companies and individuals can bring different levels of expertise and skills that can help the development of products and services that otherwise could be difficult for a single company to create. 

Anything created through a joint venture can either be marketed by the business partners or the joint venture operating independently with its own management and marketing teams.

Bundling products and services 

Bundling products and services with those of a partner can create a single offering that suits the needs of customers and delivers more value, making it more competitive. 

This could lead to increased sales and higher market share.

Expanding into new markets 

Breaking into new markets, including new demographics and territories, can be challenging. 

By partnering with other businesses, you can leverage their established presence in your target market.

For example, an international company might partner with a business offering local expertise in logistics or distribution, to establish a supply chain and a route to market.

Partner endorsement 

A simpler type of joint venture is partner endorsement, where one business endorses and recommends the products and services of its joint venture partner. 

This is similar to an affiliate relationship, where revenue is shared based on referrals from one business to another.

Shared marketing 

Pooling resources such as marketing budgets can help a collection of smaller businesses achieve greater reach and increase the effectiveness of their paid marketing efforts.

Shared risks and costs 

A joint venture allows businesses to share the financial risks and operational costs associated with a specific project or business endeavour. 

This can be particularly beneficial for costly investments or ventures that carry a high level of uncertainty. 

By sharing the burden, companies can undertake projects they might not be able to manage or finance independently.

Co-sponsoring events 

By spreading the cost of sponsoring an event with a partner in a joint venture, a business can get more bang for their buck. 

Smaller businesses can benefit from more exposure, publicity and leads by teaming up with a larger, well-known partner.

Capital intensive or high-risk industries 

Projects or ventures such as infrastructure, property development, and technology where the sharing of resources, expertise, and risks can be particularly beneficial.

Joint venture advantages and disadvantages

Joint ventures can be complicated arrangements.

While they offer strong advantages to businesses, they can be fraught with risk – from a lack of transparency and trust to culture clashes that can be a drain on resources and harm operations for both parent companies.

Advantages

Joint ventures offer several advantages for businesses looking to collaborate and grow together.

• being stronger together – when correctly set up, the best joint ventures effectively leverage both parties’ assets and strengths while cancelling out each other’s weaknesses
• time limits – joint ventures usually have a defined timeframe. Their temporary nature means businesses aren't tied together indefinitely, and exit clauses make it simple to dissolve a joint venture if it’s not working out
• diversification and scale – joint ventures allow each partner to operate at a larger scale than they could individually. This can mean access to a larger market, more diverse product and service offerings or more effective supply chains. It can help start-ups to scale up efficiently
• pooled risk – all businesses involved in the joint venture share a proportion of the risk and work towards a shared goal. This can dilute the risk that an individual business would face alone, and if the venture fails, the individual costs are reduced.

Disadvantages

Most companies are geared towards competition, which can make working together a challenge.

• culture clash – many joint ventures flounder due to a clash of cultures, processes and approaches. Differing management styles, conflicting HR processes and workplace cultures can make it hard for joint ventures to successfully mesh
• decision making – trust is vital in any joint venture, which can make decision-making more difficult if both parties need to sign off decisions and there is a lack of trust. Poor decision-making and second-guessing the other party can also lead to failure
• privacy and sharing information – a joint venture inevitably involves a degree of knowledge sharing that can mean a lack of control over your intellectual property. To ensure that sensitive corporate information isn’t made public, and that any data issues are properly handled, you could ensure that non-disclosure agreements and data sharing agreements are in place from the outset
• unequal commitment – ideally a joint venture should be an all-for-one and one-for-all proposition. A lack of commitment from one of the partners can create an unbalanced joint venture

Joint venture agreements

There is no legal requirement specifying how joint ventures should be agreed.

They can take whatever form is best suited to the circumstances – although you should consider putting a clear legal agreement in place prior to any joint venture being created.

Although businesses work together in a joint venture, they still have a legal duty to look after their own interests and comply with relevant regulations and competition law.

It’s advisable to get legal and financial advice before entering into a joint venture agreement.

Consider having a written agreement in place that sets out the objective of the venture and the expectations and management of the project.

A joint venture agreement should deal with the confidentiality of business information and the protection of data rights.

It should also outline what happens if there is a dispute between partners and when the venture ends.

If you want something more definite than a joint venture, you could consider setting up a separate limited company or a limited liability partnership, which would involve a number of other agreements and legal input.

Setting up a joint venture

Setting up a joint venture involves careful planning and clear communication between the involved parties.

Step 1 – Identify a reason for the venture

Before setting up a joint venture, clearly define why you need one – are you looking to access new markets, share resources, or develop new products?

Step 2 – Choose a partner

Once you're clear on the 'why', choose a partner that aligns with your business goals and brings complementary skills, resources, or market access.

Conduct due diligence to assess potential partners' financial stability, reputation, and compatibility to protect your venture's finances and success.

Step 3 – Consult a legal expert

Next, consider consulting a legal expert who can help you navigate the legal aspects of entering into a joint venture.

They can ensure that the agreement made between you and your partners complies with UK law.

Step 4 – Decide on the structure

Decide on the best structure for your joint venture – this may be a new company, a partnership, or a cooperation agreement.

The structure you choose for your joint venture will depend on your objectives and desired level of independence.

Step 5 – Draft and sign agreement

You will need to draft a joint venture agreement.

It should detail:

• the purpose of the venture
• the contributions of each party
• ownership structure
• management and control
• allocation of profits and losses
• dispute resolution and confidentiality
• how the venture can be terminated.

It is essential that all parties agree to these terms.

Step 6: Manage the venture

Once the agreement is signed, you can begin operating as a joint venture

It's important to maintain clear communication, manage the venture according to the agreement, and regularly review and update the agreement as needed.

Setting up a joint venture involves considerable legal and financial implications, so it is advisable to seek advice from legal and financial advisers at significant points in the process.

Exiting a joint venture

Some joint ventures can continue and transform into long-term business partnerships, while others will simply run their course within a set timeframe.

Once the project’s objective is achieved, the joint venture agreement comes to an end with mutual consent.

A well-drafted exit agreement will help prevent misunderstandings and legal disputes when a joint venture ends – so it’s a good idea for businesses to get professional legal advice when drafting this.

An exit strategy can form part of the legal agreement and should include the following details:

• exit triggers – Conditions or events that allow a partner to leave the joint venture
• the notice period – the amount of time one partner must give to the other if they want to exit
• dispute resolution – how you will handle conflicts, such as mediation or arbitration
• exit share sale – the process of valuing and selling a departing partner’s shares
• non-compete clauses - any clauses preventing partners from engaging in competing activities
• right of first refusal – ensuring a partner has the first opportunity to buy the other partner out of the venture.

Alternatives to joint ventures

Besides joint ventures, there are several other business structures and agreements that allow companies to collaborate.

In a partnership, two or more parties agree to share the profits, losses, and management of a business.

Unlike a joint venture, partnerships are typically long-term and involve ongoing business operations.

Mergers and acquisitions (M&A) involve the combination of two companies.

In a merger, companies join to form a new entity, while during an acquisition, one company buys the other (this is usually a more permanent arrangement than a joint venture).

A strategic alliance is a collaboration between companies to pursue agreed goals while remaining as separate, independent organisations.

This option is usually less formal and encompasses a narrower scope than a joint venture.

Franchising is also an option, in which one party (the franchiser) grants another party (the franchisee) the right to use its trademark or business model for a specified period.

Each of these alternatives has its pros and cons and is suited to different business situations.

Your choice of business structure depends on your business goals, resources, risk tolerance, and the level of commitment and integration you are looking for.

Tips for a successful joint venture 

Try these ideas to help your joint venture run smoothly.

• align your values and corporate culture – making sure you’re aligned helps to ensure smooth communication, reducing the chances of conflict and slower problem-solving
• set clear, realistic goals – regularly track progress against these benchmarks to make sure the venture stays on course and make adjustments as needed
• define clear roles for each partner – this can prevent overlap, ensure accountability, and help each party understand their specific contributions
• encourage regular, open communication – this ensures everyone is on the same page, reduces misunderstandings and helps resolve issues promptly
• review your objectives and adapt regularly – you may need to make some changes to stay on track, such as revising strategies, goals, or even the joint venture agreement itself.