What Is a Joint Venture Agreement Between Two Companies?

They say small-business owners have two eyes for a reason – to keep one trained on existing customers and the other on potential new ones. This condition may not qualify as tunnel vision, but it's no understatement to say that collectively, customers can form a singular focus, driving the time and directing the energies of most everyone at a small business. If you believe that customers represent opportunities for business growth, but also that opportunities come in different packages, then it may be worthwhile to consider at least widening the scope of your focus to include a joint venture.

Joint Venture Agreements Require Vision  

Joint ventures are not the exclusive domain of Fortune 500 companies. Any two or more companies, or individuals, can form a joint venture. But first, someone needs that "vision thing" to spot one that has potential. Most importantly, they must see something in another company that they want or need, whether that something is technical knowledge, experience, distribution channels, raw talent or some other crucial, missing link.

Tech firms, for example, are particularly astute at forging joint ventures. You may have read about a tech firm that possesses a patent for an innovative product pursuing a joint venture with another company that boasts the production know-how needed to bring that new product to market. Individually, they can dream, but a joint venture can allow them to realize their dream. Or, as the Legal Dictionary says: By pooling their resources, the companies "combine strengths and increase competitive advantage while minimizing risk."

Joint Venture Contracts Seal the Deal

Often, the two parties invest funds in what becomes their third, jointly owned company and share in the resulting profits or losses, Innova Counsel says.

It is the presence of this third, independent entity that especially, but not solely, differentiates this joint venture company from a strategic alliance. With the latter, the two companies remain separate, and the terms of their alliance may be spelled out in a letter of agreement or understanding – not a joint venture agreement, which is a binding legal document. Put another way, a strategic alliance is not a separate legal entity. In fact, plenty of alliances have been forged with a handshake alone. This can be a cause for delight or trepidation, depending on your point of view and objectives.

But there is no doubt that the separate entity that springs from a joint venture, as well as the joint venture agreement that dictates its operation, raises the stakes over a strategic alliance. As such, these stakes should lend a level of seriousness to negotiations as two business owners progress through the discussion and discovery stages of a potential joint venture.

Joint Venture Contracts Should Limit Risk

Theoretically, joint ventures and strategic alliances are designed to be short-term in nature, meaning not permanent. Just how short the term turns out to be varies widely; once the goal of the collaboration has been achieved, the two parties usually go their separate ways.

Small business owners who remain on the fence about which type of arrangement to pursue are smart to consult with their lawyer. With any luck, yours will ask what you hope to achieve by commingling your assets with those of another company. Your answer could lead to the correct course for you to follow, because:

  • Strategic alliances are designed to accentuate the benefits that two parties bring to an arrangement.
  • Joint ventures emphasize mitigating risk.

In fact, if a joint venture fails, the loss of each party is limited to what they, respectively, invested in it. And, significantly, creditors "don't have the lawful right to recover from either of the parent companies," Innova says.

Joint Venture Agreements Offer Opportunities 

No one wants to think about failure when two parties begin discussing the details of what a joint venture would look like and how it would function. Like small businesses, joint ventures are usually launched with great optimism for success.

Under the best conditions, they hold the promise of:

  • Huge cost savings. Just combining marketing budgets can make a joint venture wholly worthwhile.
  • Access to new resources that include technology, equipment and staff talent.
  • The opportunity to gain expertise in a new domain, thereby enhancing your staff's abilities and their value to you.
  • The ability to bring a new product to market with greater speed. 
  • A chance to acquire new customers who otherwise would be unattainable.
  • The chance to gain new insights, both positive and negative. Both instructional – about how to run a small business.
  • The possibility of burnishing your company's image, especially if the second party enjoys an enviable reputation in your industry.
  • The opportunity to infuse a professional network with new people.

Purpose Propels Joint Venture Contracts

The lawyer who probes your exact motivations should earn his hourly fee if and when you decide to pursue a joint venture. It will be up to him to draft the joint venture agreement. This is a task made somewhat easier these days by the availability of templates and other tools from the U.S. Small Business Administration and other sources.

If he's drafted such an agreement before, he may consider some sections to be pro forma. But he will almost certainly look to you for direction in crafting the purpose of the joint venture.

For this exercise, specificity counts. If you've done your due diligence beforehand, you should be able to spell out such things as:

  • Your exact goals and objectives;
  • Your strategy and tactics for achieving your goals and objectives;
  • Who will perform which tasks;
  • The communication structure; and
  • How (or if) you will share company "infrastructure" such as computers and databases, as well as staff time.

Joint Venture Contracts Should Be Thorough

More than any other quality, joint venture contracts are meant to be anticipatory. For this reason, some clauses may be extremely relevant to your situation; others may be fringe – at least for now. But many joint venture agreements include provisions for:

  • The financial investment, if any, both parties will contribute to the enterprise.
  • What assets and employees they will bring to the joint venture, as well as whether new employees will be hired.
  • How profits, losses and liabilities will be distributed.
  • Who will own any intellectual property.
  • How the joint venture will be managed, as well as the specific responsibilities of all relevant parties.
  • Who will bear responsibility for keeping financial and administrative records.
  • Confidentiality or other agreements that will protect the venture's trade secrets.
  • How any disputes will be mediated.
  • Dissolving the joint venture, otherwise known as an exit strategy.

Avoid a "Culture Clash"

Just reading between the lines, you can infer that it helps enormously to forge a joint venture with a company whose culture is similar to yours. Business annals teem with cautionary tales of mergers between companies that failed – not because their fundamental goal was ill-conceived but because their corporate cultures were incompatible.

If reducing the chance of a culture clash represents the "main course" of a joint venture agreement, then side orders of rapport, trust and respect should make it even more viable.