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Enter into Joint Ventures

A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. It involves coming together of different business entities, which contributes a combination of subsets of assets for a specific business purpose and a limited duration. It is essentially a medium to long-term contract which is specific and flexible. Joint Venture is all about combining of strengths of different business concerns into one organization. Though the joint venture represents a newly created business enterprise, its participants continue to exist as separate firms. A joint venture can be formed as a partnership firm, limited liability partnership or a company or any other form of business organisation which the participating firms choose to select. It generally has the following characteristics:-

• Right of mutual control or management of the enterprise.
• Right to share in the property.
• Joint property interest in the subject matter of the venture.
• Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking.

Types of Joint Ventures:

Joint Venture and Alliances comes in all shapes and sizes, it can take the shape of any of the following forms:

• Ownership Alliance: In this form of Joint Venture, all the partners take ownership stake in the business by contributing capital in the business, which is to be conducted as an separate business identity with some degree of management independence in which parties will share the profit and losses as per the ownership stake.
  
• Non Ownership Alliance: This type of alliance does not result in ownership stake or profit sharing or even creation of separate business entity. It includes collaborative agreement including resources sharing such as technology transfer , trademark licence, production or network sharing alliance.

Why Should I enter into Joint Venture?

Joint ventures perform a useful role in assisting companies in the process of restructuring. It can enable a firm to achieve market penetration into new areas overtime, enter and develop new product markets, expand into new geographic areas and participate in new technology driven value activities. They can also be used by smaller firms protectively as an element of long-range strategic planning. Thus, a small firm in a highly concentrated industry can negotiate joint ventures with several of the industry's dominant firms to form a self-protective network of counter balancing forces. Joint ventures are formed with several motives:-

• The main motive is to share the risks. It reduces the risks in a number of ways as the activities can be expanded with smaller investment outlays than if financed independently.
• To get access to new products and new geographical locations
• The expressed purpose of most of the joint ventures is to access to new technology, marketing and production strategies and management practice.
• Tax advantages are a significant factor in many joint ventures.

Key benefits involved:

• Shorten the Learning Curve: Building knowledge to expand into key markets, develop new products, and improve productivity, can be time-consuming and costly. Small businesses gain lead time, share expertise, and lower costs by forming joint ventures.
  
  
• Enhance Company Credibility: All businesses especially start-ups struggle with building acceptance within their market and customer base. A key alliance with a larger known branded company can dramatically improve your credibility in the eyes of your customers.
  
  
• Create New Profit Channels: Your business has limited resources and capital for growth. By formulating a joint venture with a solid partner, your company expands its sales force and distribution channel for low cost.
  
  
• Build Competitor Barriers: A strategic alliance with several key players can erect impenetrable walls, keeping out competitors and maintaining high profit margins. Once these ties are in place, it is difficult for competitors to unravel these relationships.
  
  
• Access to new markets: A Strategic alliance with major domestic and internal players , will allow to access new geographical locations.
  
  
• Limited Period: Joint Ventures are basically formed for limited span of time and therefore does not involve long term commitment.
  
  
• Concentration on core business: In the era of divesture and consolidation, Joint Venture offers a creative way for organizations to exit from non-core businesses, organizations can gradually separate a business from the rest of the organization, and ultimately, sell it to the other parent partner (appr. 80% of all joint ventures end in a sale by one partner to the other).

Important questions to be considered before JV:

There is no straight answer to this question. The decision involves addressing various elements. Some of the important questions that need to be answered before entering into JV are outlined below:

1. What do I sell, and how do I reach my target market?
   
   
2. Who are my competitors? If they are better at generating revenues and reaching the marketplace than me, what do they have that I don't?
   
   
3. Are there geographical areas that will remain beyond reach without local partners, or acquisition costs that are simply too high?
   
   
4. Do I need to develop a know-how, which has already been developed by a company or by an individual?
   
   
5. Is there a logical business partner that could help me develop a vertical or horizontal market penetration?
   
   
6. Do I have all the human resources I need in marketing, R&D, production, or operations? Is there a company I know which would have resources complementary to mine?
   
   
7. Do I have access to the right legal resources to structure the joint venture and insure all aspects are duly covered?
   
   
8. Are there local legal regulations I can bypass by partnering with a local business?
   
   
9. Do I have access to successful joint venturers who can share their experience with me?
   
   
10. Do I understand that going through the decision process entails sitting down and taking the time to write a full-fledged joint business plan?
    
    
11. Am I aware that in the vast majority of cases, merging activities, even when not necessarily identical, will result in an inevitable workforce reduction? How do I feel about letting go of some of my most faithful employees?
    
    
12. Am I looking at partnering because I don't see another way out of my current business problems? (Joint venturing should not be considered as a last resort action, but rather as one course of action among several others. This decision needs to be taken in a careful and methodical manner.)
    
    
13. Do I already know of a person or a company that I see has a real interest in partnering? Have I discussed this possibility with this person or with the person in charge of the targeted company? If yes, what is the general feeling? If no, then it is time to start a high-level discussion to gauge the level of interest.
    
    
14. What are my strengths and weaknesses? What are the threats and opportunities in my target market?

Steps towards entering into Joint Venture:

• Screening of prospective partners.
• Preliminary round of meeting to ascertain each others strengths and weakness and how there combination can be beneficial for all parties.
• Joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan
• Entering into preliminary term sheet between the partners defining their intention to form their alliances, the nature and extent of contribution of each party
• Undertaking detailed due diligence by each party- checking the credentials of the other party , it involves the detailed analysis of business and all its related components.
• Entering into detailed Joint Venture Agreement determining the following
  
  • Terms and condition of the Joint Venture
  • Management of Joint Venture
  • Right and duties of each parties
  • Obligation of each party
  • Financial Obligation of the JV Entity
  • Exit strategy and terms of dissolution of the joint venture
  • Dispute resolution
  • Termination of JV etc

Process of Joint Venture

Reasons for failure of a joint venture:

• Failure to integrate the management practices
• Non integration of
• Inadequate preplanning for the joint venture.
• Parent companies are unable to share control or compromise on difficult issues.
• Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture.
• People with expertise in one company refused to share knowledge with their counterparts in the joint venture.

Legal Implications:

For entering into Joint Venture with local partners in India, there are regulatory restrictions, no approval is required. But it is always advisable to enter into JV by legally drafted Joint Venture Agreement, which than be governed by the Indian Contract Act.

Entering Joint Ventures with Foreign Party, is subject of regulatory restrictions and it is advisable to Cleary analyse the legal framework before initiating the process of Joint Venture , as Foreigner are not allowed to do business in all sectors in India and for doing business in some specific sectors, the approval of regulatory authorities is required.

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