Joint Venture Cost: Everything You Need to Know
Joint venture cost depends upon the nature of the agreement between the parties in the joint venture.3 min read
Joint venture cost depends upon the nature of the agreement between the parties in the joint venture. When individuals or business form this kind of collaboration, there should always be a legal agreement that spells out clearly what each party contributes to the venture. This agreement describes the cost share both in terms of tangible and intangible assets.
It is common for both the profits and losses resulting from the venture to be shared by each party depending on their investment. In this case, your costs will be higher or lower depending on how much you are willing to put into the joint venture.
What Is a Joint Venture?
A joint venture is a strategic alliance between two or more people or companies toward a common objective. This alliance usually involves the sharing of:
- Intellectual property
The parties involved can be large corporations, or small businesses. Regardless of the size of the parties, the key to the success of the venture is planning and executing on that plan.
Although a joint venture combines the resources of two or more companies, it is not the same as a merger. Joint ventures do not involve any kind of transferal of ownership. Also, the venture is for a specific purpose and is temporary in nature. At some point, the companies might agree to sell the venture and split the profits, or one of the parties will buy the other's out.
Why Form a Joint Venture?
There are many reasons why businesses big and small will partner in this way:
- Small businesses may find it easier to compete against larger businesses in partnership.
- Businesses with common services and products but limited resources may find it easier to expand into other markets by joining forces.
- Large businesses wishing to benefit from the intellectual or technological resources of a smaller business sometimes prefer a joint venture over a buy-out.
- Partners in a joint venture can bring experience, insight, and expertise to everyone that they did not have individually.
- Unlike a merger, businesses in a joint venture can leave the partnership with limited risk to their businesses.
- Each business knows what they brought to the venture, and how much of the venture was their contribution. At the end of the venture, one or more partners can sell their share to the others. About 80% of joint ventures end this way.
- Not only can a business gain knowledge and expertise, but it can also benefit from the prestige of working with better known and respected businesses.
- In a joint venture relationship, each of the businesses involved build business relationships that last beyond the life of the venture.
- Companies save money by sharing costs.
- With international joint ventures, businesses have the opportunity to work with people from different cultures and ways of thinking. This can spur creativity and inclusiveness.
What Are Potential Risks?
The few studies that have been done indicate a 60% failure rate of joint ventures within the first five years. The success rate in developed countries is about 80% since there is a higher risk when partnering with third world countries. Nevertheless, this underscores the fact there are risks involved:
- Reluctance of personnel to work together and share knowledge
- Reduction of staff due to overlapping responsibilities
- Wasting time, money, and credibility should the venture fail
- Individual businesses being neglected due to focusing on the new venture
- Different management and business styles causing conflict
- Having vague or unobtainable objectives
- Unequal participation or interest leaving a few to do the work of the majority for a disproportionate share of the reward
Get Legal Assistance
If you are considering a joint venture, get legal assistance with drawing up the agreement and other documents that may be required. Do not rely upon downloaded templates. Someone well-versed in national and international regulations will help you navigate the many issues that come up. These include:
- The name and purpose of the venture
- How much each business invests in terms of assets or expertise
- The day-to-day responsibilities of each business within the joint venture
- The kind of organization the venture will be: corporation, LLC, S-Corporation, etc.
If you need help with joint venture cost, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.