Joint ventures: could one work for your small business?

Joint ventures are a popular option for UK small businesses looking to grow and expand their operations. 

According to a recent report by PwC, the number of joint ventures in the UK has risen by 45% over the past decade and 68% of UK companies are considering a joint venture as a way to enter new markets or gain access to new technologies or expertise.

But what exactly is a joint venture, and would it work for your small business? In this article, we’ll explore the different types of joint ventures and look at some of the key benefits and challenges of this business model. We’ll also share some examples of the good and the bad, and provide practical tips for those considering this option for their own business.

What is a joint venture?

A joint venture is exactly what it sounds like: a collaboration between two or more participants to achieve a specific goal, task or project.

This business arrangement operates as an entirely separate entity. That said, the participants are responsible for all profits and costs associated with the joint venture.

Why do companies set up joint ventures?

Companies may form a joint venture for many reasons, including sharing the burdens when it comes to the expansion of the business, extra funding support when it comes to new product development, or moving into new markets, especially overseas. 

They would typically seek a joint venture partner when they know there is a particular knowledge gap or missing skill set required to take things to the next level. 

Using the example of a new company ready to venture into overseas markets – a joint venture partner would be useful in this case because the partnership could bring:

• Shared resources: Sharing resources through joint ventures can provide partners with access to new materials, manufacturers and more. By working together, partners can achieve their shared goals more effectively and efficiently in this area than if they were working alone.
• Reduced costs: Having an additional partner can work in your favour when seeking investment, trying to obtain loans and gaining investments from banks as well as other financial institutions.
• Shared expertise:  In the case of a new overseas market, for example, a UK business owner may not be well versed in the international laws and regulations required to operate. There might be translation issues, delays and tips-and-tricks missed when you don’t have that ‘inside’ person who can show you the ropes. A local joint venture partner could assist with those missing knowledge gaps, fulfilling anything from logistics to legal.
• Access to new markets: In a new country, there are trends, different demographics and different needs of consumers to consider. It would be perfect to have someone who has lived in the country long enough to understand the pain points of consumers, as well as the best ways they could be communicated with and marketed to.

What are the different types of joint ventures?

There are a variety of different ways you can enter into a joint venture, and the best one for you would be determined by things like your industry and goals. Here are a few examples:

• Contractual joint venture: This is a situation in which an agreement is made (typically on a time-based basis) in which two parties come together for a particular business project or campaign, and sign a contract outlining the terms under which they will work together. The parties enter into a contract outlining their respective roles and responsibilities for the venture. This type of joint venture is less formal and less risky than an equity joint venture.
• Equity joint venture: In an equity joint venture, two or more parties (often known as venture capitalists) will contribute capital and share the profits and losses of the venture. Each partner owns a percentage of the venture, and decisions are made jointly.
• Limited liability joint venture: A limited liability joint venture (LLJV) is a type of joint venture where the parties limit their liability for the venture to the amount of their investment. Each party contributes a certain amount of capital to the venture and agrees to share in the profits and losses, however unlike other types of joint ventures, the liability of each party is limited to the amount of their investment. This means that if the venture incurs significant debts or legal liabilities, the personal assets of the parties are not at risk beyond the amount of their investment.
• Cooperative joint venture: In a cooperative joint venture, the parties share resources and work together to achieve a common goal. This type of joint venture is often used in the agricultural sector, where farmers may pool resources to purchase equipment or sell their products.
• Joint marketing venture: In a joint marketing venture, the parties work together to market a particular product or service. This type of joint venture can be used to share marketing expenses and reach a broader audience.
• Joint research and development venture: In a joint research and development venture, the parties collaborate on research and development of new products or technologies. This type of joint venture is often used in the pharmaceutical, biotech, and technology industries.

How do joint ventures work?

How a joint venture works in practice will vary depending on its structure, industry and objectives. However, some fundamental aspects and considerations on how to set up, run and dismantle a joint venture apply to most arrangements. 

The formation of a joint venture

A joint venture occurs when two or more parties agree to work together. But how to find an appropriate participant?

Whether you’re looking to partner with a company or an individual, there are plenty of places to start your search.

Our guide on how to search and find a business partner has more information, but in summary, these could include the following:

• Existing contacts – You could save yourself time and money by partnering with an existing contact such as a supplier, customer, investor or simply someone you’ve met socially. Checking your personal and professional contacts database is a great way to get started.
• Trade shows – These events provide a panoramic view of your industry, and give you insight into how potential partners present themselves, handle clients and pursue new business.
• Search engines – For best results, make sure you type in the sort of keywords you’d use to describe your own business, or those specific to the type of company you’d like to partner with.
• Social media –  Look for companies which follow you, add you as a friend or visit the same pages as you. They may well share your interests and objectives.

Before you approach a prospective joint venture partner, due diligence is crucial. Many companies publish key financial data on their site, so you may be able to download the latest set of accounts, and you may even wish to sign up for newsletters and email alerts too.

When you’re examining a company, look at how they present themselves. Is their website up to date? Is their correspondence professional? Are they punctual in handling enquiries? If they can’t promote their own business effectively, chances are they won’t be able to promote a joint venture either.

You can also visit the Companies House Register, which provides up-to-date information on all UK limited companies and search basic information free of charge, or download an in-depth company report for just £1.

Finally, a quick Google news and reviews search should bring up all the latest stories and testimonials about your potential joint venture partner. If they’ve got any skeletons in their cupboard, you should be able to find out here.

Next, you’ll want to plan out how your joint venture relationship will work. 

What kind of arrangement will you have? How will the work, responsibilities and profits be split? These are all things you will want to think about before entering into a joint venture with your potential partner.

You are allowed to work together on a verbal agreement alone, but it is always far more helpful to have something in writing defining the terms of the business partnership, such as responsibilities, liabilities and matters of ownership.

Here are the details you should include in your agreement:

• Contribution – how much capital is each partner paying into the business?
• Ownership – what percentage of the company does each partner own?
• Distribution – how will your profits and losses be distributed amongst the partners?
• Responsibilities – which areas of the business will a partner look after? (for example, financial reporting)

You may also want to determine the measures for what happens in the unfortunate event of disagreements or conflict within your business or project, which leads us to our next section:

The management of a joint venture

As you can imagine, the day-to-day management of a joint venture varies based on each individual company and their goals. However, there are some things that stay consistent through every successful venture.

Every good partnership is sure to have a good level of communication (for example, regular meetings, progress reports, and updates to ensure that all important partners and stakeholders are informed about the project’s status, challenges, and opportunities). Good project management skills (and software) are essential here.

Establishing the terms of the agreement is also crucial. This includes defining the scope of the joint venture, the roles and responsibilities of each party, the division of profits and losses, and the exit strategy. A well-drafted joint venture agreement should also address potential disputes and provide a framework for resolving them.

The parties involved in a joint venture may also want to ensure that they are properly legally covered both for the type of work they are doing and the country they are based in. There is the possibility of potential claims and liabilities arising during the course of the project, so an indemnification agreement can help to protect one or both of the parties from unexpected losses.

Joint ventures will involve sharing sensitive business information between the parties involved in most cases, and this is where non-disclosure agreements would come in. Non-disclosure agreements can help protect confidential information and prevent it from being shared with unauthorised parties.

The termination of a joint venture

The termination of a joint venture can occur for various reasons, such as the completion of the project, the achievement of the venture’s objectives, or the breakdown of the relationship between the partners.

This is when the exit plan or strategy comes into play, ensuring a smooth ending (even after a bumpy ride). There should be procedures in place to distribute the remainder of assets according to whatever agreement was originally established and resolve any outstanding liabilities or debts together. Plus, notify any third parties that may be affected by the termination of the venture, such as employees, customers, suppliers, or other stakeholders.

Advantages of joint ventures

We have already covered some of the reasons companies look to set up joint ventures but there are other advantages to consider.  

• Increased market share: Joint ventures can help businesses increase their market share by combining their resources and expertise to enter new markets or expand their presence in existing ones. By pooling their resources and sharing the costs, partners can leverage their strengths to compete more effectively.
• Reduced costs: Joint ventures can help businesses reduce their costs by sharing the expenses of a project or activity. For example, two companies may form a joint venture to share the costs of research and development or to jointly purchase raw materials or equipment. By sharing the costs, partners can achieve economies of scale and reduce their overall expenses.
• Increased innovation: Joint ventures can also lead to increased innovation by combining the knowledge, and resources of different partners. By sharing their expertise, partners can develop new products, services, or technologies that they may not have been able to develop on their own. This can help businesses stay competitive and adapt to changing market conditions.
• Risk sharing: Joint ventures can help businesses share the risks associated with a project or activity, reducing their exposure to potential losses and mitigating the impact of unforeseen challenges or setbacks. This can help businesses pursue new opportunities and initiatives that may have been too risky to undertake on their own.

Risks of joint ventures

Where joint ventures do have their advantages, there are also certain risks and disadvantages. These include:

• Loss of control: Joint ventures involve sharing control and decision-making power between partners. This can lead to a loss of control for each partner over certain aspects of the business. For example, one partner may be less involved in decision-making related to a particular project for whatever reason, which could impact their ability to achieve their desired outcome.
• Conflict between partners: Joint ventures require partners to work together towards a common goal, which can lead to conflict and disagreements. Partners may have different opinions on how to approach a particular issue or project, which could lead to delays, miscommunications and misunderstandings, and potential damage to the relationship between partners.
• Financial risk: Joint ventures require significant financial investment, which can be a significant risk for partners. If the venture fails to meet its objectives, partners may incur financial losses. Additionally, partners may be responsible for any debts or liabilities incurred by the joint venture, which could further increase financial risk.
• Legal risk: Joint ventures involve complex legal agreements that require careful consideration and negotiation. Partners may be exposed to legal risks if the joint venture agreement is not properly drafted or if legal issues arise during the venture. These risks could include breach of contract, intellectual property disputes, and regulatory compliance issues.

Joint venture examples: the good and the bad

We’ve given you the theory. Now, let’s take a look at some real-life success and horror stories. 

Joint ventures: the good

One example of a successful luxury joint venture is the partnership between French luxury goods company Hermès and Swiss luxury watch manufacturer, La Montre Hermès.

In 1978, Hermès acquired a 25% stake in La Montre Hermès and formed a joint venture to produce high-end luxury watches. The partnership allowed Hermès to expand its product offerings beyond leather goods and fashion accessories, while La Montre Hermès was able to leverage Hermès’ brand and design expertise to create luxury timepieces.

The partnership has been successful, with the two companies collaborating to create some of the most iconic and sought-after luxury watches in the world. One of their most famous collaborations is the Hermès Cape Cod watch, which has become a signature timepiece for the brand.

Through their joint venture, Hermès and La Montre Hermès have been able to combine their expertise, resources, and brand power to create a successful luxury product line that is still highly valued by consumers today.

Joint ventures: the bad

In September 2012, the cereal and food manufacturer Kellogg Company joined forces with Singaporean food company Wilmar International, with the intention of breaking further into the burgeoning Chinese food and beverage market. They also chose to partner with Wilmar International because they had a large network in China that Kellogg was hoping to tap into.

However, despite these benefits, Kellogg did not accurately assess the potential risks well enough –  the reputation and practices of their new partner. It was uncovered that Wilmar International was allegedly growing palm illegally and engaging in slash-and-burn practices, both major drivers of deforestation, according to the WWF.  

The resulting PR disaster and mismatch of crucial values were what ultimately led to the dissolution of the business.

Conclusion

Joining forces with another, like-minded person or entity can be a great way for you to achieve a specific commercial goal or project. However, it is essential to carefully consider the risks and rewards and put procedures in place to protect you and your business financially, legally and operationally before embarking on your joint venture adventure.