Many business owners have at least once considered having a joint business plan, since the financial returns will likely be higher. To start such a joint business plan, or a joint venture, you have the chance to merge resources with another party. That is, you don’t need to invest more. That way, you maximise your profit.
Although it sounds very advantageous, there are also disadvantages. Additionally, a joint business plan is different from a partnership, so these terms shouldn’t be confused. This article explains to you the concept of a joint venture, and how to start yours.
What Does a Joint Venture Look Like?
A joint venture is a business agreement where two or more parties come together for a project or a new business activity. The business goal here is generally short-term, and this joint business plan can be formed with an agreement. The agreement is to state that both parties are on the same side.
This business agreement involves merging the resources to accomplish the business’ goal. Any legal structure can be a part of a joint venture. Entrepreneurs often form this business partnership with a local business to enter a foreign market.
Each party is responsible for profits, losses, and costs in this business activity. The venture is kept separately, and the parties split the profits that the venture makes. The length of the agreement and the amount of the resources may vary.
How Is It Different From a Partnership?
The main difference is the length of the business activity. A partnership is long-term and a joint-venture is not. To further elaborate, when two or more parties come together to start a business, they form a partnership. Partnerships are businesses, whereas joint ventures only take on projects.
In the case of a partnership, all parties are owners of the business. That is, they share liability as well as profits and losses. So, a partnership requires more responsibility from each party, and it lasts as long as the business does.
How Can You Form A Joint Venture?
It is not difficult to create a joint business plan. There are a few steps you need to follow.
Decide If Your Business Requires a Joint Venture
As we mentioned above, it is not always advantageous to merge resources. It can damage your business as well as strengthen it. So, you need to think carefully before you start the process. Don’t know how to decide?
- Research what others do: Competitor research always comes back with positive effects. Check how many businesses have a joint venture. See whether they are gaining and whether it is beneficial for them.
- Evaluate your business closely: Before you decide, consider all the gaps in your business. And think about whether a joint business plan would fill them or not. If the answer is no, then there is no need for such a thing!
Choose the Right Partner
If you want to succeed in this journey, make sure that your business is in the right hands. Each party must be on the same page and aim for the same goals. Of course, knowing the gaps in your business plays a key role here, again. A well-defined business objective will help you find a good match. You will then choose a company in line with your business objective.
Choosing a good company is not enough. You need to make sure you get along well with your new ‘partner’. Spend some time together to figure out if you are good together. It is essential to see if they care about this collaboration as much as you do. Lastly, check if you can trust these people. Nobody wants to leave their business to someone they don’t trust.
Pick a Type of Joint Venture You Want
There are two options to form a joint business plan. One is to establish a new separate entity for your joint venture business. Each party has an ownership interest in the new legal entity. For instance, you may decide to establish a corporation, a limited liability company, or a partnership. Then you would conduct your business via this new entity.
The second option is having a contractual partnership. This option involves having a contract where the terms of the business relationship are set. This alternative is cheaper. Before you choose from these two, consider what your business venture requires, and how much money you want to spend to establish it.
Prepare Your Joint Venture Agreement
Regardless of the type you choose, you must have a written agreement. In the end, the logic behind it is to have a business agreement. Start with a term sheet or a letter of intent. This will help you unfold the following steps. A term sheet should include material terms and conditions. Similarly, a letter of intent provides a summary of principal terms and conditions.
Your joint venture agreement can be long and complex, or the other way around. This depends on the business venture and the relationship with other parties. Make sure you work through how you will share the profits and losses. Include the number of resources from each party.
Other important things you must include in the agreement are the tax payments and the exit strategies for each party. If you find these too legal, you can form a team to deal with these issues, and prepare the agreement.
After these steps, your joint venture is ready. The only thing you need is to make it work.
Advantages and Disadvantages of Joint Ventures
Joint ventures are:
- Helpful to enter new markets.
- Time-limited: you won’t work with other parties forever. When the goal is achieved, the agreement can be dissolved.
- Flexible: you don’t have to cover everything you do in your business in a joint venture. Bring whatever you want.
- Safer in case of a big loss: since you share the profits and the losses with other parties, you don’t have to embrace the loss alone.
On the other hand, joint ventures:
- Take a long time to build the right business relationship.
- May require more complex tax regulations.
- May crash due to cultural differences: business cultures among the parties can vary, and it might lead to negative results.
The Bottom Line for Joint Business Plans
No matter how big your business is, and how much money you make, you can always consider forming a joint venture when necessary. Because it runs for a short period, it sounds safer if you don’t like long-term commitments. Though, it is important to find out whether you need a joint business plan or not.
If you are interested, follow these steps to see where you are now, and how you can establish a joint venture. Always play safe and don’t match with companies or people that you don’t trust. In the end, it is your business, and you don’t want to waste it along the way.