An Overview of Joint Venture Agreement
A joint venture is a business proposition between two or more entities that pool in their resources for their mutual benefit to achieve a common objective. The joint venture agreement formalises this arrangement between the parties. A joint venture shall involve sharing of assets, intellectual property, manpower and other such resources. Based on the needs of the entities, the joint venture can create a new entity or merely give rise to contractual obligations.
Benefits of a Joint Venture Agreement
Following are the benefits of a Joint Venture Agreement:
- Economies of Scale
A joint venture agreement helps the parties to ramp up their production capacity. Individually each entity will have a limited capacity, but in a joint venture, they can utilise each other's resources.
- Reducing the cost of production
One of the most important objectives of a joint venture is to ensure that both companies can earn a high amount of profit. The easiest way to achieve this goal is to reduce the cost of products or services.
- Access to new Markets
The joint venture enables the companies to have wider access and easy entry to new markets. For example, a joint venture between a company in India and UK will enable both parties to have easy access to both markets, which would otherwise be difficult for both brands to achieve in a small period of time.
A joint venture agreement provides room for innovation in various spheres such as product development, technology, marketing etc. The constant incorporation of new ideas will contribute to the exponential growth of the venture.
- Intellectual property
It is not easy to develop best-in-grade technology in the market for a company, this results in several smaller firms to participate in a joint venture with larger firms to gain access to their intellectual property. This would enable the smaller venture to save a lot of time and money.
- Joint Investments
The parties to a joint venture need to contribute some initial capital for a project, this burden is divided between them. The division of capital will depend upon the terms of the contract, but it shall alleviate the financial burden nonetheless.
- Increased credibility
The joint venture usually has one party that is a huge brand and carries a big name in the market. During the agreement, the lesser-known brand can use the goodwill of the famous brand. This creates a sense of trust among consumers and gives the venture an advantage over its competitors.
- Sharing of expertise and knowledge
It is not necessary for brands to have expertise in all aspects of the business. The joint venture allows the companies to share with each other the technical know-how and expertise of the business, this gives all the parties a chance to develop and grow.
- Reducing competition
The joint venture agreement's motive is for the companies to pool their resources and not indulge in meaningless competition. This is beneficial for all the parties and helps them to achieve the common objective efficiently.
The joint venture agreement can be structured as per the needs of the parties involved. From the investment of capital to the decision over profit share and losses everything can be pre-decided as per the requirement and goals of the company.
Types of Joint Ventures
There are four types of joint ventures based on their needs, these are:
- Project Joint Venture:
The most popular type of joint venture is the Project Joint Venture. This joint venture is entered into by the parties for the completion of a particular project. This type of joint venture exists for a specific task or a definitive time period. Once the purpose is achieved, the joint venture shall cease to exist.
- Function-based Joint venture:
A function-based joint venture is designed so that the parties can benefit from each other's expertise. This step helps the parties to carry out their tasks efficiently. The agreement would lay down the tasks that each entity will help/assist with so that role of each participant is defined.
- Vertical Joint Venture:
This type of joint venture is between two entities in the same supply chain, which means the parties involved in the agreement are making the same product but are contributing at different points of the production chain. Such joint ventures are usually carried out between the raw material suppliers and the manufacturers. A vertical joint venture results in lowering the cost of the product and is beneficial both for the companies as well as the consumers.
- Horizontal Joint Venture:
In a horizontal Joint venture, all the parties are making the same final product. So instead of competing with each other these entities join hands and put their effort to reach a larger consumer base. This is commonly practised in ventures where one brand is foreign and usually requires the involvement of a domestic company as per law. Geographical expansion is often the goal in such ventures.
Important aspects of a Joint Venture Agreement
A business must consider the following points before entering into a joint venture agreement:
- Defining the Object and Purpose: The companies must have a clear idea regarding the purpose for which they want to enter into the joint venture agreement. The entities must also clearly specify the objective for the creation of the venture.
- Financial Aspects: this part of a joint venture agreement involves aspects such as the ratio for profit and loss sharing, investment of capital, the ratio of bearing the expenses in the venture, and the strategies to raise capital if required in future.
- Management: The next major thing under the joint venture agreement is deciding how it shall be managed. Here the parties have to consider the ratio of representation from each company. The management is responsible for carrying out the day-to-day functions. Hence all the parties must have a common consensus.
- Confidentiality: As the resources of all the entities shall be utilised, the sensitive data or confidential information may be switching hands. So, the parties must ensure there is a confidentiality clause in the agreement so that no one misuses the data available to the venture.
- Non-Compete provision: The joint venture will involve the exchange of technology and experience hence it is advised to parties to sign a non-compete agreement so that no one gains an unfair advantage over the other using those resources.
- Indemnity: In case of breach of the terms of the contract, the party which commits the breach will be liable to pay compensation to the other party.
Dispute Resolution: whenever two or more parties enter into a contract, there is a high chance of conflicts and disputes between them. So to ensure that the entities don't lose a lot of money in litigation to deal with issues, a contract must have a dispute resolution clause to settle any possible disputes that may arise.
Documents Required for creating a Joint Venture Agreement
Following Documents are required for creating a Joint venture agreement
- Memorandum of understanding/ Letter of intent
- Term sheets
- Business transfer agreement
- Agreement for the transfer of intellectual property
- Technology transfer agreements
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