Joint Venture

A joint venture is when different companies cooperate as partners. In several cases it can be advantageous for companies to cooperate with other companies.

What is a joint venture?

One possibility is the joint venture. On this page you can find out what the term means, when it makes sense to work together in this way and what other details you should know.

In principle, the meaning of the term joint venture is already revealed by a simple translation (joint = joint, venture = risk). In connection with companies, joint venture means a cooperation in which the partners participate with their own capital. They jointly bear the financial risk of their investment. The partners also jointly perceive the management of the company.

A joint venture may also be described as a joint venture. This legally independent company is always founded and managed by two or more independent companies. In most cases, the level of capital participation at the time of incorporation influences the decision-making authority of the individual partners. In principle, however, a joint venture is autonomous and not obliged to follow the instructions of the founding partners.

When is a joint venture a good solution?

Companies decide to set up a joint venture for various reasons. This form of cooperation is most frequently chosen in order to divide the entrepreneurial risk between two or more partners. Furthermore, a joint venture makes sense if the partners have specific resources that can be easily combined. These can be, for example, the following factors:

  • Excellent competitive position
  • Distinct (local) market knowledge
  • know-how
  • Locations, production facilities

For example, a joint venture can open up access to new markets. Depending on the extent of the cooperation, it even has the potential to influence the development of an entire industry. Moreover, this approach is not new. Already in the post-war period, US companies in particular took advantage of cooperation with foreign companies to expand their trade borders.

In principle, a joint venture bundles the strengths of the founding companies. This creates competitive advantages and synergy effects. However, joint ventures also have weaknesses. They are therefore not always the ideal form of cooperation. Let's take a closer look at the advantages and disadvantages below.

What are the advantages and disadvantages of a joint venture?

In the case of cooperation in the form of a joint venture, companies generally pursue the same interests. However, each partner naturally has different ideas about processes, organizational structures and goals. This form of cooperation thus holds a certain potential for conflict. The following table summarizes the individual advantages and disadvantages of a joint venture.

Advantages of a joint venture:

  • Competitive advantage by bundling know-how and skills
  • Synergies: Savings opportunities and efficiency advantages through joint use of resources
  • Reduced capital requirements for the individual partners
  • Lower entrepreneurial risk
  • transfer of knowledge
  • Minimization of market entry barriers

Disadvantages of a joint venture:

  • Goals of the partner companies can contradict each other in parts
  • Decisions cause high coordination effort
  • Negotiating conflicts can take a long time
  • Possible limits due to competition law provisions
  • know-how leak
  • For international joint ventures: intercultural challenges, problems due to different legal bases

Last but not least, joint ventures are regarded as an unstable construct. This is reflected in the often limited lifetime of joint ventures. Often one partner takes over the business area of the other participating company and thus the sole management.

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What forms of joint ventures are there?

Joint ventures can be distinguished both in terms of cooperation orientation and capital participation.

For example, ahorizontal joint venture is considered to exist if the cooperation partners are active in the same sector. A vertical joint venture, on the other hand, exists when the partners come from different stages of the value chain (e.g. raw material suppliers and finishing companies). The following distinctions are also possible:

  • Concentric joint venture: Partners come from related industries
  • Conglomerates Joint Venture: Partners come from completely different industries

As far as equity participation is concerned, a distinction can be made between theparity joint venture (identical participation ratios, e.g. 50:50) and unequal joint ventures (e.g. 75:25).

In addition, joint ventures can be divided into the following categories:

  • equity joint venture
  • contractual joint venture

The main difference is that in an equity joint venturea joint venture is formed, whereas in acontractual joint venture only contractual relationships are entered into.

Equity joint venture

If two or more partners with an equity interest join forces to form a legally independent company, this is referred to as an equity joint venture. In this standard case, therefore, an enterprise with its own legal personality is created. In most cases, long-term terms are agreed for the cooperation in the range of 30 to 50 years. The joint venture will be able to import and export products. It can acquire land use rights, construct buildings and also employ foreign employees. Both profits and losses are shared between the venturers. The distribution key depends on the capital invested.

Contractual joint venture

The Contractual Joint Venture does not have an independent joint venture. The partners conclude a contract under which the risk, profit and cost sharing of the partner companies is regulated. Compared to the equity joint venture, the contractual basis can be designed more openly. Among other things, a free determination of the profit and loss distribution key is possible. The same applies to voting rights. Since the contractual joint venture does not necessarily have to be a legal entity, the companies involved are not liable with their contribution in every case. A legally prescribed minimum participation does not exist either. In addition, the costs of incorporation are lower. Under certain circumstances, however, partners may be held directly liable.

If the partner companies come from different countries, there is an international joint venture. The counterpart to this is the domestic joint venture (all partners based in the same country).

What legal form can a joint venture take?

Joint ventures may have different legal forms. It is common, however, to set them up in the form of a corporation (e.g. GmbH or AG). On the other hand, the choice of a commercial partnership is less frequent. The choice of legal form has a significant impact on accounting and reporting. The German Commercial Code (HGB) applies to corporations, while no specific regulations exist for GbR (Gesellschaft bürgerlichen Rechts). It is not uncommon for the choice of corporate form to take tax aspects into account.

How is the joint venture accounted for?

Joint ventures are not subsidiaries within the meaning of the German Commercial Code because they do not have a controlling influence or uniform management. They are therefore included in the consolidated financial statements via two special regulations:

  • Equity method: Equity value in the partner's balance sheet corresponds to equity development in the joint venture
  • Proportionate consolidation: Income, expenses, liabilities and assets are included in the balance sheet in accordance with the proportionate interest held.

What belongs in the joint venture contract?

As a rule, the cooperation partners conclude a joint venture agreement in which they regulate in detail the decision-making, management and termination of the joint project. Equity joint ventures also require a partnership agreement. There should be synchronism between the two components.

As far as the joint venture contract is concerned, there are some typical fields of regulation in detail. In particular, the following points are fixed:

  • Executive bodies and standardization rights: management, supervisory board, departmental responsibilities
  • Economic goals: mostly multi-year planning of future business operations
  • Financing (incl. future capital increases)
  • Financial reporting (incl. information and disclosure rights)
  • Shareholders' and supervisory board meetings
  • Conflict resolution procedure
  • Transfer of shares: Permission and restrictions
  • Prohibitions: Customer protection, poaching of personnel, non-competition clauses
  • Secrecy and confidentiality
  • Compensation in the event of dissolution of the company
  • arbitration agreement
  • Licensing and licence fees
  • Subscription rights and delivery obligations
  • Personnel regulations (employment and perosance costs)
  • Training and further training agreements
  • Provision of material resources (machines, plants, buildings, etc.)

What are the alternatives to the joint venture?

In addition to the joint venture, there are a number of other forms of cooperation for companies. If, for example, one of the partners does not want to take on any financial risk, it is advisable to conclude a so-called management contract. If, on the other hand, an investor wishes to contribute capital and exploit synergy effects, but does not wish to assume management responsibility, a participation model is interesting.

In addition, there are some other forms of joint ventures as an alternative to setting up a joint venture. In particular, the following should be mentioned:

  • Working groups: A merger that is limited to a specific project (often in the construction industry).
  • Consortia: cooperation for temporary projects (e.g. for large-volume contracts)

Both variants are purely functional communities that are established for short periods of time.

So-calledstrategic alliances are furthest away from the joint venture. They are usually limited to the coordination of strategies or goals between two or more companies.

Examples of joint ventures

Several well-known joint ventures have already been realized in Germany. One example is Volkswagen Autoversicherung AG. It was founded in 2013 by Allianz and VW. The aim of both companies was to take out more car insurance policies. More than 40 percent of VW vehicles were to be sold directly with an insurance contract within five years.

In 2009, the energy companies E.ON and RWE established a joint venture to build nuclear power plants in the UK. Both partners have a share of 50 percent. The long-standing cooperation serves, among other things, the purchase of locations and the handling of complex approval processes. The joint venture will also be responsible for the construction and operation of the nuclear power plants themselves. Both partners contribute their expertise, human resources and also their good knowledge of the UK energy market.

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Emre Cetin, Sales Executive

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