JOINT VENTURE AGREEMENT
What is a Joint Venture
A Joint Venture is an agreement in which 2 or more individuals or businesses come together for the purpose of achieving the commercial goal. Joint Venture Agreements are governed primarily by the Indian Contract Act, other cooperate laws are also applicable.
Joint Venture is a business agreement in which parties come together to take on one project by equally investing in the project in terms of time, money and effort
What a joint venture might look like:
- Each party contributes assets and shares risks and agree to share income and expenses.
- It may be short term or long term.
- In most cases, the individual entities retain their legal status
Examples of Joint Ventures
1 Joint ventures can combine large and small companies on big and little projects. Here are some examples:
2 MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company to see all their beer brands in the U.S. and Puerto Rico.
3 In 2011, Ford and Toyota agreed to work together to develop hybrid trucks.
4 A great example of an Indian Joint Venture with a foreign company is the airline, Vistara, a Full-Service Carrier. Vistara is the brand name of Tata SIA Airlines Ltd, a JV between India’s corporate giant Tata Sons and Singapore Airlines (SIA).
5 Bharti AXA General Insurance Co Ltd is a JV between India’s leading business group Bharti Enterprises and insurance major from France, AXA.
The Joint Venture Agreement Requires
- Parties to the agreement
- Percentage ownership
- Distributive share of each party
- Bank account
- Resources (usually a list)
- Employment (employees and independent contractors working on the venture)
- Administrative records
- Financial statements.
Advantages of Joint Venture
- Starting a Joint Venture helps in saving money as the expenses are shared.
- Forming a joint venture with larger companies helps small businesses in enhancing credibility.
- Small businesses can increase the sales force with the help of larger companies.
- Joint Venture Enterprises are flexible i.e., each party has the freedom to continue with the individual business.
- Joint Ventures can be easily dissolved.
Disadvantages of Joint Venture
1. The objectives of Joint ventures are not cent percent clear.
2. As there are different parties or businesses are involved there is a lack of communication between partners.
3. It may be hard to exit the partnership as a contract is involved.
4. There are more chances of conflict and misunderstanding.
5. The work and resources are not always equally distrusted.
Why do Joint Venture Fail?
The main reason for the failure of a Joint venture is a Communication problem and Management problem.
1. Lack of previous experience and different opinions of partners leads to conflicts and delays in decision making.
2. Language and Cultural barrier make it difficult for the partner to understand what other partner wants to say, which eventually results in misunderstandings and disputes.
3. Misunderstandings, disputes lead to mistrust between the partners which affects the success of the Joint Venture.
1. Partner focuses more on the personal profit rather than concentrating on Joint Venture profit which leads to a lack of management in the business.
2. Insufficient planning is also one of the most prevalent reasons for the failure of Joint Venture.
3. Maintaining agreement on strategy is not easy, partners disagree on the strategy which often leads to confusion and delay in the decision thus affecting the management of Joint ventures.
How to prevent failure?
1. Good communication and cooperation among the partners.
2. Focus on business profit rather than individual profit.
3. Proper research about the background of the partner before entering into a Joint Venture.
4. Partners should work on the same goal and vision.
Joint Ventures that failed in India –
1. Kinetic Honda – It was a joint venture between the Kinetic Engineering Ltd. And Honda Motor Company
2. Hero Honda – It was a Joint Venture between the Hero Group and Honda Motor Co.
3. TVS – Suzuki – It was a Joint Venture between TVS Motor Co. And Suzuki Motorcycle Pvt. Ltd.
4. Yamaha – Escorts – It was a Joint Venture between the Yamaha Motor Company and Escorts
Steps to form a Joint Venture
PLANNING – The planning includes decision making on the following issues- goals and objectives of the business, determination of the product, analysis of the market, targeting the correct market, predictions of the revenue, and the strength and weaknesses of oneself.
PARTNER SEARCH – It is one of the most important decisions of a Joint Venture. One should consider the financial resources of the partner, the presence of the partner in the target market, capabilities, and resources of the partner, creditability study.
FEASIBILITY STUDY- Analysis of the partners comfort with the latest technology of Joint Venture, analysis of the financial gains and losses among the partners, analysis of authority and responsibility among the partners, environmental analysis of the Joint Venture in the market.
INCORPORATION – A Joint Venture can be incorporated by local and foreign firms forming a Joint Venture, by two local firms forming a Joint Venture, by foreign investors buying an interest in the local firms or by local investors buying an interest in a foreign firm.
Purpose of Joint Venture
When two or more businesses wish to achieve a common goal where they are ready to share the profits and losses, risks, and rewards they form a Joint Venture. This will help them to grow and less or no outside funding would be required. The joint venture will also help in expanding the business and developing the products by accessing wider markets. Sometimes, for starting a new business project strategic alliance with an individual or group may be required for completing the project. In this type of situation, joint venture agreements are might be required.
What a Joint Venture is NOT a partnership.
A joint venture may have some similarity to a partnership, but it's not. A partnership is a single business entity formed by two or more people. A joint venture joins several different business entities (each of which may be any type of legal entity) into a new entity, which may or may not be a partnership. Partnership income taxes are paid by the owners individually.
How a Joint venture agreement Formed?
Joint ventures are usually formed through the legal procedures of creating a memorandum of understanding, a joint venture agreement, any ancillary agreements, and obtaining regulatory approval.