An agreement defining the terms of the partnership or joint venture is essential and further legal protection is advisable. Teaming up must be a win-win situation for both parties. Businesses involved with complementary activities or skills are usually the most appropriate candidates. For example, a group of sole traders - a carpenter, builder and electrician - could form a company, which could increase their credibility in the construction trade and allow them to bid for larger contracts. A group like this also represents greater customer appeal, as it's a one-stop shop.
A joint venture JV is a legal partnership between two or more companies wherein they both make a new third entity for competitive advantage. With a JV you will have something more than simple governance; you'll have a completely new entity with a board, officers, and an executive team. Effectively a JV is a completely new organization, but owned by the founding participants. The board of directors generally is comprised of representatives of the founding organizations.
They share their core strengths with each other. They will have an open door relationship with another entity and will mostly retain control. The length of agreement could have a sunset date or could be open-ended with regular performance reviews.
However, they simply would want to work with the other organizations on a contractual basis, and not as a legal partnership.
When a joint venture is created, it is owned by the original firms that created it. In the case of a merger, the owners of the newly formed company are the same as the owners of the original two companies.
A joint venture involves a lower level of commitment from the two parties than a merger. A joint venture can be a good way to test the waters to see how well two firms work together. It can also be used for a temporary arrangement to work on a short-term project. A merger, in contrast, involves a virtually permanent commitment.
Although it is possible to break up a company, doing so can be difficult, costly and disruptive to business. A merger is useful when two businesses wish to become fully integrated -- that is, when two firms have enough overlap that they can perform most of their business together. A joint venture, on the other hand, typically has a much more limited scope.
However, some employees may not be able to retain their positions, as mergers often are accompanied by job cuts. Likewise, a joint venture may experience difficulties with communication among the member companies.
Information and directives must travel across multiple channels, and misunderstandings or delays could potentially result. However, these communication difficulties do not need to be a permanent concern, since joint ventures are temporary setups.
Unlike in a merger, in which the relationship is fixed, a joint venture can be formally dissolved once the short term, targeted goal has been reached. The company itself could be sold or one of the partners may choose to buy out the other member's share. Conversely, the companies may choose to continue working together on another venture, if it would benefit each entity to do so.
Whatever the result, both companies gained from consolidating their resources and establishing new business contacts.
Elisabeth Natter is a business owner and professional writer. She has done public relations work for several nonprofit organizations and currently creates content for clients of her suburban Philadelphia communications and IT solutions company.
Her writing is often focused on small business issues and best practices for organizations. Her work has appeared in the business sections of chron.
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