What is a Joint Venture?

Hands shaking at conference table

In 1985, Car and Driver magazine ran the headline “Hell Freezes Over” following the surprising success of a recently re-opened auto manufacturing plant known as the New United Motor Manufacturing Inc. (NUMMI) in Fremont, California.

The plant had operated for 20 years under the management of General Motors (GM) but was known for being one of the auto industry’s worst facilities due to rampant negligence and the resulting defective vehicles. GM closed the plant in 1982, but the following year a shocking joint venture between Toyota and GM changed everything.

At the time, GM and Toyota were rivals struggling to stay afloat in the competitive U.S. auto market. GM had difficulty building profitable small cars, while Toyota excelled in building sedans, but faced difficult import restrictions from the U.S. government and lacked the knowledge to manage American workers.

A joint venture was formed in which Toyota agreed to share its production secrets and GM agreed to help them adapt the acclaimed “Toyota Way” management style for American workers at the NUMMI facility. 

The results at NUMMI were astounding, as performance soared and the facility racked up J.D. Power Awards for being one of North America’s best auto-plants. Although the plant closed in 2010, it is remembered as one of the most successful joint ventures ever formed.

A joint venture presents a remarkable opportunity for companies to achieve success through collaboration, but it’s important to know exactly what you’re getting into before shaking hands and signing paperwork. Learn how a joint venture is defined, the advantages and disadvantages of a joint venture, and other important information to know before establishing a partnership of this type.

Joint Venture Definition

A joint venture is a cooperative arrangement in which two or more businesses agree to form a new entity that will be mutually beneficial for both organizations. Typically, joint ventures are formed to achieve success for a particular project or goal, such as a research or production activity.

These partnerships can be short term or long term and usually involve sharing or combining resources such as employees, capital, equipment, or even intellectual property such as patents. A joint venture agreement is usually signed by all parties detailing how assets, profits, and losses will be managed in addition to what type of business structure will be used for the new entity.

Advantages of a Joint Venture

Whether a company lacks physical resources or intangible expertise⁠—collaborating with other businesses mutually benefits all parties by utilizing partners’ strengths to overcome weaknesses within an individual organization. A joint venture also allows firms to share risk and reduce the financial commitment which mitigates negative impacts if the project doesn’t work out.

Disadvantages of a Joint Venture

Establishing a joint venture can be a lengthy process as organizations negotiate terms and conditions for the agreement. Businesses may have different expectations and goals which can impact how long they want the project to go on for and the amount of resources needed for it to succeed. Some companies may be contributing fewer resources than partners, which can complicate profit/loss sharing terms within the agreement.

Disputes can also arise during the joint venture, which can complicate matters and create issues for partners. Management styles may clash and differences in workplace cultures can lead to difficulties in achieving project goals.

How to Form a Joint Venture

A joint venture can be established with an informal verbal agreement and handshake, or it can be extremely detailed through a formal legal document signed by all parties. Although a joint venture can be formed with a verbal agreement, a written contract is recommended to ensure all responsibilities and expectations are clearly defined and understood among partners.

What to Include in a Joint Venture Agreement:

  • The names of all parties involved
  • The goals of each business
  • Definitions of success for the joint venture, ideally in terms of quantifiable metrics
  • Start and end date of the joint venture (subject to change, and may vary by party)
  • Member obligations (resource commitments and other responsibilities) 
  • Profit/loss sharing terms
  • The voting process, including how much say each party will have in decisions
  • Location(s) of the venture
  • Type of business structure for the new entity
  • Dissolution process, with non-compete and confidentiality clauses

You’ll also want to make sure you go through all the regular processes of starting a new business when forming a joint venture. See our comprehensive new business checklist to make sure you cover all your bases.

Get Help Managing Finances for a Joint Venture

Managing resources and tracking finances for a single business is complicated enough, but when multiple partners get involved these tasks can seem overwhelming. ScaleFactor can help automate and organize finances for a joint venture with our easy to use accounting software. Gain visibility by using real-time information from multiple parties that are organized into one place for greater understanding and easier management. 

Request a demo today to learn how ScaleFactor can help you manage finances for a joint venture.

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