Joint Venture (JV)

Updated on April 4, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Joint Venture Meaning

A joint venture (JV) is a business arrangement between two or more parties. These parties are coming together and pooling their resources to complete a specific task. The parties have joint ownership and therefore share costs, losses, and profits.  

The purpose of a joint venture is to attain a competitive edge while minimizing risk. This is achieved by combining strengths and pooling resources. The parties sign a joint venture (JV) agreement that establishes the partners’ rights, obligations, initial contribution, objectives, day-to-day operations, and profit-sharing ratio.

Key Takeaways

  • A joint venture (JV) is a temporary legal association of two or more individuals or organizations to attain a particular objective.
  • The collaborating parties contribute their resources (including financial, technical, material, and human resources) to enter a Joint Venture.
  • Joint Venture (JV) Agreement: The parties mutually discuss and agree to the terms and conditions. The collaboration has a specific tenure and automatically terminates after the purpose of its formation is fulfilled.

Joint Venture Explained

A joint venture (JV) is formed when two or more business entitiesBusiness EntitiesA business entity is one that conducts business in accordance with the laws of the country. It can be a private company, a public company, a limited or unlimited partnership, a statutory corporation, a holding company, a subsidiary company, and so on.read more come together to achieve a common purpose. The idea of the JV is to combine the strengths of each unit. Also, together the weaknesses get subsided. Sometimes, the parties under a JV form a new business entity altogether. In that case, they call it partnerships, corporations, or limited liability companiesLimited Liability CompaniesLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read more. If not, these associating business entities keep their existing identities and go for a JV agreement. 

In a joint venture, partners share resources, assets, and equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more. In most cases, the joint venture is initiated to achieve a single purpose like research or production of a certain product. But it can also be formed for an ongoing objective. Since a joint venture is a temporary arrangement, the companies are not bound beyond the stipulated period. The specific duration of collaboration is predetermined upon mutual agreement.  

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Joint Venture Examples

#1 – General Motors and Ventec Life Systems 

Washington-based company Ventec Life Systems and the world-renowned General Motors entered a joint venture agreement. The companies collaborated to increase the availability of multi-functional ventilators across America to aid the Covid-19 battle.

The collaborative venture developed a production facility in Indiana. In the first month, the facility delivered 30000 units of VOCSN (Ventilator, Oxygen Concentrator, Cough Assist, Suction Pump, Nebulizer) to the US Department of Health and Human Services. Ventec ramped upRamped UpRamp Up in economics refers to the boosting of a company’s production.read more monthly production from 150 ventilators to 10000 VOCSNs.

#2 – SAS and Microsoft

Microsoft Azure and SAS AI Analytics entered a joint venture in February 2020. The collaboration developed an emergency response system for crisis management. This comprehensive technology-based solution was designed for disaster management response. The system can be used during natural disasters like floods, hurricanes, etc.

SAS efficiently forecasts hazards using historical and real-time data. Further, it used Microsoft’s technology to automate the various manual public services in disaster-prone areas to strengthen communication.  

Joint Venture Agreement

A joint venture (JV) agreement includes the following:

JV Agreements can be drafted using standard templates.

Types

Following are the different types of joint venturesTypes Of Joint VenturesThere are mainly four types of joint venture which includes Project-based joint venture, Vertical joint venture, Horizontal joint venture, Functional-based joint venture.read more (JV) classified according to their purposes:

Joint Venture Types

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  1. Project-based JV: These are formed for accomplishing a particular project. It could be the construction of a dam, road, bridge, or completion of a research project.
  2. Vertical JV: It is a collaboration between companies operating at different levels of a supply chain to attain economies of scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. read more. These companies sell the same products or services.
  3. Horizontal JV: This association occurs between two or more parties operational in the same product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more. It is a collaboration among competitors.  
  4. Functional JV: Such a joint venture aims to exchange resources and synergySynergySynergy is a strategy where individuals or entities combine their efforts and resources to accomplish more collectively than they could individually.read more. In doing so, it benefits all the collaborating parties.
  5. Limited Co-operation: In this JV, the co-ventures get along for a fixed contractual term to perform a particular task. This could be for advertising and marketing an innovative product.
  6. Separate JV: Here, the parties form a new business entity to continue the joint venture. The co-ventures become corporate partners in the new company, each holding a percentage of shares.

Advantages

Whenever two or more parties associate, they aim to derive some benefit from such a collaboration; let us now discuss some of these advantages of a joint venture (JV):

Joint Venture Advantages

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  • Facilitates Market Penetration: For many companies, joint ventures are a medium of entering a new market, say a foreign market.  
  • Access to Advanced Resources: Joint venture organizations share their resources to reap maximum benefit and ensure cohesive growth. The resources could be financial, material, technical, or personnel.
  • Shared Risks and Costs: In a joint venture, the collaborating parties bear the risks and costs as per the agreement. As a result, the liability gets distributed.
  • Builds Business Relationship: Though joint ventures are temporary arrangements, it does result in a long-term relationship between firms.  
  • Economies of Scale: This is another significant advantage of entering a joint venture. Since the resources multiply, production is ramped up, and the cost of manufacturing reduces.
  • Improves Profitability: A JV uplifts the potential of the collaboration. As the business efficiency increases, sales and profit rise.
  • Restricts Entry of New Firms: When existing business entities come together, the product prices become competitive. This further limits the scope for new entrants.

Disadvantages

Some of the most common Joint Venture (JV) limitations are as follows:

  • Resource Mismatch: In a joint venture, there are possibilities that both the firms aren’t equally competent. Hence, while one party reaps higher benefits by contributing less, the other remains dissatisfied despite pooling maximum resources.
  • No Equal Involvement: Often, two or more parties within the joint venture play a small role. This can potentially lead to discrepancies and conflicts.
  • Different Cultures: Since two or more individuals or companies come together, cultural clashes and disagreements do occur. It is not always possible for different styles to work together.
  • Lack of Communication: There can be multiple barriers like language, demographics, distance, or a difference of opinion causing poor communication.

Joint Venture vs. Partnership

A joint venture (JV) is a temporary collaboration of individuals or companies for the accomplishment of a particular task. On the other hand, a partnership is a long-term association between individuals for producing goods or services. JV parties sign a JV Agreement, whereas long-term partners draft a mutually accepted partnership deed or contract.

Joint Venture (JV) vs Partnership

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A Joint Venture (JV) terminates after the specific duration or task completion. On the contrary, a partnership lasts longer for the entirety of the business’s life span. All JV parties are liable in case of an offense or violation. But in a partnership, only the partner at fault is held responsible for wrongdoing.

Frequently Asked Questions (FAQs)

What are the features of a joint venture?

Some of the prominent characteristics of a Joint Venture (JV) are listed below:
• Collaboration of two or more parties, i.e., individuals or firms
• A mutually agreed upon JV agreement
• Realization of a common purpose
• Sharing of resources, profits, expenses, and risks
• Temporary association for a specific period

Why do firms enter into joint ventures?

A joint venture (JV) is formed for specific objectives like research and development, business expansion, synergy, upscaling, market penetration, superior technology, and increased profits.

How are joint ventures accounted for?

A joint venture (JV) is a legal association of two or more parties, whether individuals or organizations, that come together for fulfilling a particular task or objective. For this purpose, these collaborating parties contribute their financial, material, and human resources. JV accounting depends on the degree of control exercised by the co-ventures. Accordingly, an equity accounting method is adopted when the level of control on such a venture is significant.

This article has been a guide to Joint Ventures (JV) and its Meaning. Here we discuss joint venture types, agreement, and how it works using examples. You may also look at the following articles to learn more about M&A.