What is a Joint Venture?

Have you ever thought about teaming up with another company for a project? If so, you’re not alone. Joint ventures (JV) have become increasingly popular as businesses seek new growth and expansion opportunities.

A JV is a strategic alliance between two or more companies that agree to work together on a specific project or venture. This can be a great way to share resources, expertise, and risk. It can also help you reach new markets and customers.

I’ve helped many companies navigate the joint venture process as an attorney. I’ve learned a lot of valuable lessons along the way. In this article, I’ll discuss some key aspects of joint ventures, including what they are and how to create one.

What is a Joint Venture?

A joint venture is a partnership between two or more companies working together to achieve a common goal. The parties to a joint venture remain legally separate, unlike a merger. Instead, a joint venture focuses on a specific project, product, location, or service.

There are several situations where a joint venture may be used, but I come across three scenarios most often:

  • Innovative Collaboration: when two companies team up to create a new line of products or services.
  • Entering the American Market: When a foreign organization wants to do business in America.
  • Global Expansion: American companies may form joint ventures when they expand to foreign markets.

Understanding the purpose of a joint venture is key to the next step: finding the right partner.

Finding a Joint Venture Partner

Finding the right joint venture partner is extremely important. Joint ventures require great faith and trust, especially when operating overseas. The wrong partner can lead to a myriad of legal headaches. Bad products, financial missteps, and regulatory violations can all do more than just sink a joint venture. They can destroy a company. Some of the factors to weigh when making this decision include:

  • Alignment of Objectives: Each partner will have their own goals and objectives. But there should be a shared vision for what the strategic alliance will accomplish.
  • Financial Stability: A successful JV requires financial commitment from all parties involved. Potential partners need to be financially sound.
  • Track Record: Partners with a string of lawsuits or investigations against them could pass those issues on to the JV.
  • Operational Compatibility: Compatible operational practices can significantly smoothen the JV process.
  • Complementary Strengths: Each partner should bring something unique to the table. A potential partner may be able to provide technology, funding, market access, or specific expertise.
  • Communication and Transparency: Open communication and mutual understanding are essential in a JV.
  • Exit Strategy Agreement: Joint ventures are usually limited engagements. Whether it lasts months or years, the parties must understand their exit plan.
  • Legal and Regulatory Compliance: Partners with regulatory risks may not be the best choice. This is especially true in international JVs.
  • Risk Tolerance: Companies have varying thresholds for risk. Ideally, partners would share a similar appetite for risk.

Choosing the right JV partner combines strategy, intuition, and due diligence. Once the right partners are in place, the next step may be a memorandum of understanding (MOU).

Memorandum of Understanding (MOU)

JV relationships often begin with a memorandum of understanding (MOU). This document sets the foundation for the JV agreement, clarifying the basic terms. The MOU mostly ensures the parties are on roughly the same page. Accordingly, don’t expect it to be very thorough. It’s common for the MOU to feature some confidentiality and non-compete language.

The Joint Venture Agreement

The joint venture agreement is where the rubber hits the road. This agreement is the governing document of the joint venture. It details the rights and responsibilities of the party to the JV. Some of the key provisions in a joint venture agreement include:

  • Rights and Responsibilities: what each partner is responsible for in the joint venture. This section will typically discuss how the duties will be performed as well.
  • Term: A good JV agreement is clear about how and when the joint venture relationship will terminate.
  • Profit Sharing: The parties must understand how profits and losses will be shared.
  • Representations & Warranties: this is where the parties will confirm that they are able
  • Compliance. The agreement may have language requiring compliance with the Foreign Corrupt Practices Act (FCPA) and other pertinent local regulations for international joint ventures.
  • Creation of JV Entity. Many joint ventures will require the creation of one or more entities. These entities are usually owned by the parties to the JV and play an important role in carrying out the joint venture’s operations.

These are just a few items often included in joint venture agreements. These agreements can be much more complex, depending on the situation.

Joint Venture Examples

Let’s go over some hypothetical scenarios to get a better idea of how joint ventures work. We will go over the three common scenarios mentioned earlier in the article.

Scenario 1: Innovative Collaboration

Sippy Frog Tea is known for its high-quality oolong tea. While its tea is delicious, Sippy Frog lacks mainstream appeal because it is only sold in tins. Sippy Frog reaches out to Punk Mouth, a popular energy drink manufacturer, over the possibility of creating a new line of drinks.

The companies execute an MOU which expresses their intent to work together and creates some basic terms for their negotiation. After a few months of talks, they execute a Joint Venture Agreement that covers the actual joint venture plan.

Pursuant to the joint venture agreement, Sippy Frog and Punk Mouth created “Sippy Punks,” which manufacture canned oolong tea beverages with exciting flavors like “Watermelon Explosion.” Sippy Frog provides the oolong tea for the products, and Punk Mouth is responsible for canning the beverages and adding extra flavoring. The products are a hit, and the JV continues for years.

Scenario 2: Entering the American Market

EuroBrass is a German manufacturer of brass fittings for hoses. Eurobrass has seen great success in the European market, and it has been approached several times by US companies that would like to use its brass fitting in America. As it is, the cost of shipping small batches of fittings to America raises the price too much to make it financially viable.

EuroBrass begins looking for a distributor in America. The plan is to have a company that can ship large batches of fittings, which can then be distributed to customers across North America. EuroBrass explores a potential JV with Big Joe Distribution. Unfortunately, Big Joe has been the subject of numerous lawsuits ranging from breach of contract to fraud.

Fortunately, EuroBrass can find a reliable joint venture partner in Integrity Warehousing. The parties execute a MOU and then a joint venture agreement. The JV ends once EuroBrass has developed its distribution network in America. A plan it was upfront about from the beginning.

Scenario 3: Global Expansion

Flags & Friends Football is a nationwide network of recreational flag football leagues for kids. The leagues emphasize teamwork and fun over competition, which makes them a popular choice with some parents. There is enough demand overseas that Flags & Friends begin exploring how it can set up leagues in other countries.

Through joint ventures, Flags & Friends set up leagues in several countries. Several countries have restrictive rules over local ownership of entities. One of Flags & Friend’s local JV partners is LegitCo. Due to a lack of options in the country and a rush to get the local league going Flags & Friends did not conduct proper due diligence before forming a joint venture with LegitCo.

As it turns out, LegitCo is owned by the son of a high-ranking government official in the country. The son convinces his father to expedite the league’s formation and block potential competitors from setting up in the country. This works out well for Flags & Friends initially, keeping them from asking “too many questions.”

Unfortunately, the Department of Justice and SEC did ask questions. After a long and expensive investigation, Flags & Friends paid millions of dollars in fines, and some executives were subject to criminal prosecution. The company folds, and thousands of kids are saddened by losing their league.

Concluding Thoughts on Joint Ventures

Joint ventures can spur growth but require careful planning and partner selection. As illustrated, the right approach can lead to success, while oversight can have significant repercussions. When considering a JV, thorough research and clear communication are essential. As always, this article is only meant to be educational and does not provide legal advice. If you are interested in a joint venture, please talk to an attorney with the proper experience.