A joint venture is a strategic alliance where two or more people or companies agree to contribute goods, services and/or capital to a common commercial enterprise. Joint ventures can have great advantages for small businesses.
Properly chosen and implemented, joint ventures can be a way for your small business to get in on opportunities (and profits) that otherwise you would miss out on. They're like diamonds on the beach. You see the diamonds lying on the sand but try as you might, you can't pick them up – until you team with someone else who knows the trick of scooping them up.
Joint Venture Advantages
By teaming up with other people or businesses in a joint venture, you can:
- Extend your marketing reach
- Access needed information, resources, and skill sets
- Build credibility with a particular target market
- Access new markets that would be inaccessible without the partner
- Access technical expertise and know-how that your company may be lacking
- Access intellectual property that would otherwise be out of your reach
- Access new revenue streams
- Share risks and expenses
For instance, suppose you and five other potters form a joint venture to hold a Potter's Fair on a particular date. Because you pool your resources, you're able to do much more advertising and promotion than you would be able to go alone, bringing out crowds of customers for your joint event.
Joint Ventures versus Partnerships
At first thought, a joint venture sounds like a partnership, doesn’t it? But legally, joint ventures and partnerships are not the same thing (see Forms of Business Ownership). In a strategic alliance there is no exchange of ownership between the companies involved.
The main difference between a joint venture and a partnership is that the members of a joint venture have teamed together for a particular purpose or project, while the members of a partnership have joined together to run "a business in common".
Each member of the joint venture retains ownership of his or her property.
And each member of the joint venture shares only the expenses of the particular project or venture.
Tax-wise in Canada, there are also differences between joint ventures and partnerships. As a member of a joint venture, you will receive a share of the profits which will be taxed according to whatever business structure you have set up. So, for instance, if you operate a sole proprietorship, your joint venture profits will be taxed just as any other business income would.
Joint ventures enjoy tax advantages over partnerships, too. Capital Cost Allowance (CCA) is treated differently. While those in partnerships have to claim CCA according to partnership rules, those in joint ventures can choose to use as much or little of their CCA claim as they like (see How to Calculate Capital Cost Allowance).
And joint ventures don’t have to file information returns, unlike partnerships.
Examples of Joint Ventures
Agriculture is a business that is well suited to to joint ventures. As the cost of land, equipment, and supplies continues to increase, smaller farms are under pressure to increase the size of their operations to take advantage of economies of scale.
By grouping multiple small operations in a joint venture, farmers might, for example, be able to share expensive pieces of equipment that may be idle part of the time, rather than each individual farmer having to purchase the same tractors, combines, etc.
Or a biotech company might team with another to share the cost of research.
A small business may be able to expand more quickly by getting into a joint venture with a company that has more financial resources.
But almost any business is capable of leveraging the power of joint ventures. Think of BMW and Toyota co-operating on research into hydrogen fuel cells, vehicle electrification and ultra- lightweight materials, for instance, or Google and NASA developing Google Earth.
The key to getting the advantages of joint ventures working for your business is to identify another business or businesses that would benefit from the same project your business will benefit from.
How to Get a Joint Venture Started
- The first step to creating a joint venture is to set your goals and decide what you want your joint venture to do. If you need help getting started with this, look at the four things a joint venture can do that I've listed at the beginning of this article, pick one, and then develop a goal that is as specific as possible.
- Then it's time to look for the like-minded - people or firms that might be interested in the same goal or goals you want to pursue. Look in the business groups you already belong to, both in person and virtually. Use your social networking connections. Study business listings on websites and social media to find those that might share your goals. Do some background research on potential candidates:
Do they have resources that complement yours?
- Are they financially secure?
- Do they have a good reputation with customers and other businesses they may be involved with?
- Be open to being asked. Once you start talking to other people about what you might do together, a joint venture idea you haven’t even thought of might pop up - one with a lot of potential.
- Once you've found the people to share in a joint venture, be sure to have it all put into writing in a joint venture agreement. I strongly recommend hiring a legal professional to do this. The agreement should cover issues such as:
The goals and structure of the joint venture
- The management structure - roles, responsibilities, and decision making
- The financial obligations of each participant
- The division of profits, losses, expenses, liabilities, etc.
- How disputes should be resolved
- The ownership and protection of intellectual property
- Termination of the joint venture
Expand Your Reach
So instead of dismissing an opportunity as out of your reach, start thinking instead about how you could participate with a joint venture. Properly planned and executed, the advantages of joint ventures can help your small business go where it's never been able to go before.