Benefits and Risks Associated with Joint Ventures
Meeting the ever increasing demand for innovative products at affordable prices is a constant challenge for all industries. Joint Ventures (JV) are an effective way to deliver these demands. They allow organisations to pool their resources together and create a new space for innovation by bringing expertise from various fields together.
The joint venture between Cadbury Schweppes PLC and Carlyle Group to create the American Bottling Co. and the multilateral, transatlantic alliance between Lufthansa Airlines and Air Canada are all examples of innovative joint ventures. However, these partnerships don’t necessarily end in success stories. Sometimes these partnerships can also lead to serious conflicts of interest and harm the reputation of its partners.
Here is a broader look at the pros and cons of joint ventures:
What are Joint Ventures?
Joint ventures are a special classification of business partnerships. A joint venture is a contractual agreement between two or more businesses that collaborate together to achieve a specific business undertaking or development. Each partner has a specific set of responsibilities that it needs to fulfil within the period of time stated in the agreement. Each partner is held equally liable for the debts incurred and shares the profits evenly.
Although by definition, a joint venture may seem similar to a partnership, but they differ from each other in the terms of their tenure. Partnerships are abiding business relationships while joint ventures tend to be goal specific and dissolve once those objectives are realised.
To ensure a successful collaboration, it’s crucial that joint ventures begin with clear and fair agreements. Some of the key matters that need to be included in a joint venture contract are:
- Obligations of each of the partners
- Percentages of profits and losses shared among the partners
- Degree of control that each partner has in the venture
- An outline for the process of decision making employed and each partner’s authority regarding the same
- Share of each partner in the supply of project staff and other collaterals
- Share in the capital invested by each partner
- Mode and period of payment for each partner
There are several other salient points that need to be included in the agreement including the source and type of insurance used, mode of dispute resolution etc. An experienced business lawyer can help you draft an effective JV agreement, ensuring effective collaboration.
Some of the main benefits of joint ventures are:
- They provide new investment opportunities for the partners, broadening their market prospects
- The liability is shared equally among all the partners, making risk management easier
- Each partner gets access to better and more diversified resources
- Joint ventures are flexible as their term is limited
Some of the major risks involved with joint ventures are:
- Lack of clarity regarding the obligations and responsibilities of each of the partners
- Clash in the management styles and techniques of different partners, leading to frequent conflict
- An imbalance of the capital and the resources invested by the partners leading to frequent arguments and conflicts of interest
- Ineffective resolution of conflicts
However, most of these risks can be managed by the effective use of alternative dispute resolution techniques. Methods like mediation and arbitration can help you balance the pros and cons of joint ventures. Book an appointment with our experienced law firm today to address your concerns regarding these partnerships and effectively navigate through their risks.