A joint venture (JV) is a business arrangement in which two or more organizations agree to unite their resources for the purpose of carrying out a specific task. Tasks might include the research and development of new products, selling into a new market, or other operational pursuits.
It’s important to note that a JV is its own business entity, and so all revenues, costs and profits are associated with the JV and are considered separate from each organization’s business interests. Upon launching the JV, the JV does not start at zero, as each participant in the JV does contribute its own resources — capital, staff and assets — to the venture.
Understanding Joint Ventures
JVs can be formed regardless of the size of the underlying participant companies and can take on any legal structure. There are three main reasons why companies form JVs, as follows.
To Leverage Resources
A JV aims to use the strengths of the participant companies, though usually there is little overlap. For example, one company may have superior manufacturing and distribution facilities, but another company may own several well-known consumer brands.
To Save Costs
By leveraging resources, the idea is to save costs. That same manufacturing and distribution company might need to spend a lot in advertising to achieve the same brand recognition as that of the other company, so by entering into a JV, their pooled resources end up in significant cost savings for each. Even if the companies are in the same industry, a JV of their operations might save in labor, materials costs or taxes.
To Combine Expertise
The combined expertise of the two or more companies entering into a JV can lead to unknown benefits down the road, such as new products or markets. While the JV may have been formed to accomplish one particular task or goal, there might be innumerable, unknown benefits that can arise through a joint venture.
Joint Venture vs. Strategic Alliance
Many people use the terms strategic alliance and joint venture interchangeably, but they are distinct.
While the two arrangements may have the same goals — new product development, selling into a new market — the legal structures of each are different.
A strategic alliance is a collaborative agreement between two or more companies that wish to pursue mutually beneficial goals, but in which the companies remain completely separate entities. In the course of carrying out their mutually arranged activities, the companies will most likely share their resources, revenues and profits. The companies can pool their knowledge, experience and personnel as they see fit, with each company filling in the gaps of the other.
While this sounds exactly like what is going on with a JV, the difference with a JV is that the companies sign a contractual agreement and create a new jointly owned company.
Let’s have a closer look at the differences between the two.
Again, because a JV is a new and separate legal entity, there is a binding contract. Arriving at the contract often requires meetings and sign-off from multiple parties from the companies entering into the JV. However, in a strategic alliance, the two or more parties agree to terms and can “seal the deal” with no more than a handshake. There might be a letter of understanding or a letter of agreement to spell out the terms and set expectations from all parties, but the documents are not part of a binding contract, as would be the case with a JV.
Again, a strategic alliance is not considered a separate legal entity, while a joint venture is. Because of this, the management structure is often different. Executives of companies entering into a strategic alliance generally maintain their current professional roles while taking on additional responsibilities as demanded by the strategic alliance. However, because the JV is a separate legal entity, its structure often requires that there be a completely different management team overseeing the operations of the JV.
Benefits vs. Risk
A strategic alliance is often forged to maximize the benefits and opportunities that two or more companies can bring to the table. In a joint venture, however, the emphasis is often on limiting risk. Such would be the case, for example, when two competing manufacturers create a JV to unite operations in a particular region to minimize labor costs, taxes and tariffs.
Though a strategic alliance isn’t governed by a contract, how will the organizations know when it has run its course? When does it end? Generally, the answer is when the goals are achieved. Even if the strategic alliance eventually fails, due to poor performance or disagreement, or because there is no binding legal contract, the parties can simply part company and go their separate ways.
Legal Documents and the Need for a Virtual Data Room
Regardless of the decision to establish a legal structure and create a JV, or simply to draft a memorandum of understanding for a strategic alliance, all documents should be made available securely for all parties to evaluate them, in order to speed the evaluation process.
Companies should consider using a virtual data room to host these documents in the cloud in order to assure speedy due diligence. With rights management, permissioning, tracking and other advanced features, companies could delay decision making without it.
Organizations should consider an enterprise document security solution like Caplinked that has years of experience working with corporate, financial and legal teams and providing data rooms for transactions and ventures of all sizes. Reach out to start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Houston Chronicle – What is the Difference Between a Joint Venture and a Strategic Alliance?
Investopedia – Joint Venture