Are Two Heads Better Than One? The Risks and Benefits of a Joint Venture

With economic uncertainty still looming, companies are increasingly looking to share the costs of pursuing new opportunities through joint ventures.

Just last month, Toyota and BMW announced the formation of a joint venture to develop new products and technology, including a new fuel cell and a joint platform concept for a mid-size sports vehicle.

In basic terms, a joint venture is an association of two or more entities (or persons) that combine their resources and expertise to operate a single business enterprise. The parties generally have the right to control the operation of the enterprise and share in the profits and losses.

Joint ventures are advantageous in a wide variety of circumstances, such as: when one party holds a patent that another seeks to commercialize, when one company holds a strong market share in a sector that another company wants to enter, and when two or more parties seek to share the cost of developing complimentary products and services. Joint ventures have several other obvious benefits, some of which include:

• Shared skills and contacts: Particularly in international ventures in developing countries, where a local “partner” is a legal requirement, or in a technology venture where know how or a skilled development team is needed, the joint venture structure is an enabler that is often followed up by the parties firming a more formal corporate entity as the joint venture matures into an operating entity.
•  Shared risk: One of the most attractive benefits of a joint venture is the ability to reduce the costs of failure should a new product, investment, or service fail to take off. This is particularly true in industries where development costs are high and in developing countries where political change and economic unrest that can derail even a well-executed business plan.
• International access: Partnering with a local business can facilitate entry into international markets, which often present legal or cultural barriers.
• Funding feasibility: Joint ventures allow companies to pursue opportunities that they may not be able to finance or raise capital to fund on their own.
• Increased competitiveness: By joining forces, smaller companies can often compete with larger rivals.

As with any business decision, there are also risks to consider. The biggest hurdle for most joint ventures is the negotiation stage. In fact, many joint ventures fail before an agreement is ever signed. Unless both parties are willing to sacrifice at least some of their self-interest, the venture will likely be unsuccessful, costing both sides both time and money.

Before launching the new venture, the parties must resolve a number of legal issues, including the structure and management of the joint venture, the financial contributions of each party, the mutual goals and objectives of the parties, the duration of the partnership, and the protection of intellectual property. Another key issue us to have an agreed end game objective, or, at least, different objectives that do not materially conflict.

If you have any questions about joint ventures or would like to discuss the options for your business, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.