What is the definition of joint ventures and how do they work?

Think of them as the superhero team-ups of the business world, where different companies join forces to achieve more together.

In this guide, learn more about joint business ventures for small businesses. Discover key advantages, potential pitfalls, and essential considerations before creating your own.

Definition of joint ventures

What is a joint venture, anyway? A joint venture in business or a joint venture agreement refers to a strategic partnership between two or more companies for a specific, mutually beneficial project or opportunity.

The result? Participating entities leverage their combined strengths to achieve a shared goal — such as entering a new market, launching a product, or reducing costs through economies of scale.

Besides the work they do together, the businesses involved maintain their legal independence. Also, these ventures are usually temporary. Once a goal is reached, the relationship may be dissolved.

Types of joint business ventures

There are several types of joint ventures small business owners may consider. Here are some examples:

• Equity-based joint venture: Companies invest and share ownership in a new entity, with profits and losses distributed accordingly.

• Contractual joint venture: Businesses collaborate through a contract, outlining roles, responsibilities, and profit-sharing arrangements.

• Cooperative joint venture: Businesses cooperate without forming a separate entity, typically for a specific project.

Benefits and potential risks of joint ventures for business owners

Joint ventures can deliver significant benefits to small businesses, including a path to accelerate growth. Here are some potential advantages:

• Shared resources: Joint ventures allow businesses to pool financial or operational resources to be able to undertake large, more complex projects.

• Risk management: By sharing financial and operational risks, each partner can reduce individual exposure.

• Access to new markets: Joint ventures provide an opportunity for companies to expand into new regions or market segments.

• Accelerated growth: Joint ventures can expedite business growth by tapping into a partner's customer base, infrastructure, and expertise, saving time and resources.

On the other hand, here are some potential drawbacks to consider:

• Organizational conflict: Differences in management styles, decision-making, and conflicting interests between partners can lead to disputes.

• Less independence: Businesses entering into joint ventures may need to compromise on their independence, as decisions often require consensus or approval from all partners.

• Financial risks: Financial obligations and liabilities are shared, so one partner's financial instability can affect the entire venture's viability.

• Legal and regulatory compliance: Joint ventures can be subject to complex legal and regulatory requirements, especially in different jurisdictions.

Key considerations before forming a joint venture

When it comes to evaluating a potential joint venture opportunity, here are some potential factors to consider:

• Are you in alignment? Evaluate the compatibility of your company with the potential partner in terms of culture, values, and objectives. Ensure alignment in terms of goals, expectations, and long-term vision.

• Conduct due diligence. Research your potential partner, assessing their financial stability, reputation, legal standing, and any potential conflicts of interest. Identify and assess the risks and develop strategies to mitigate them.

• Make it official. Define the specific objectives and goals in a detailed, legally binding agreement. This can be essential to help avoid misunderstandings and disputes.

Legal and financial aspects of joint ventures

When navigating through a joint venture, pay close attention to legal and financial aspects like:

• Profit sharing, which defines how earnings are distributed among partners.

• Liability, which concerns who bears responsibility for debts and legal issues.

• Exit strategies, which outlines the process for ending a venture.

These considerations can be complex, varying by jurisdiction and industry. Best practice is to consult financial and legal advisors before forming a joint venture.

Evaluating joint venture performance

Forming a joint venture is just the beginning. Evaluate your progress with these key performance indicators (KPIs):

• Revenue: Measure the increase in total revenue generated by the joint venture.

• Return on investment (ROI): Calculate the ROI by dividing the net profit generated by a joint venture by the total investment made.

• Market share expansion: Monitor the growth in market share achieved by a joint venture within a targeted market or industry.

• Operational efficiency: Track operational KPIs such as cost reduction percentages, resource utilization rates, or cycle time reductions to measure the effectiveness of a joint venture's operations.

These KPIs may provide a snapshot of a joint venture's success. However, it's essential to conduct research and consult with industry experts to establish relevant and actionable KPIs for your specific objective.

Creating a joint venture can be a powerful tool to help scale your operation – whether your goal is to tap into a new global market or produce an innovative product line close to home. Get more helpful tips and strategies to run and grow your business.