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There are different types of joint ventures. How you set up a joint venture depends on what your business is trying to achieve.

Common types of partnership structure in a joint venture

Joint ventures can be:

• incorporated – eg a company or a limited liability partnership (LLP)
• unincorporated – eg a partnership, a cooperation agreement or strategic alliance

Typically, joint ventures are established through:

1. Limited co-operation

This is when you agree to collaborate with another business in a limited and specific way. For example, a small business with an exciting new product might want to sell it through a larger company's distribution network. The two partners agree a contract setting out the terms and conditions of how this would work.

2. Separate joint venture business

This is when you set up a separate joint venture business, possibly a new company, to handle a particular contract. A joint venture company like this can be a very flexible option. The partners each own shares in the company and agree on how they should manage it.

3. Business partnerships

In some cases, a limited company may not be the right choice. Instead, you could form a business partnership or a limited liability partnership. You could even merge the two businesses.

Choosing the right type of joint venture

When deciding what form of joint venture is best for you, you should consider if you want to be involved in managing it. Think through what might happen if the venture goes wrong and how much risk you want to accept. You should carry out due diligence when choosing the right joint venture partner.

Protecting your business in a joint venture

You will need to create a joint venture agreement that clearly sets out how the joint venture will work and how you will share any income.

It's worth taking legal advice to help identify your best option. The way you set up your joint venture affects how you run it and how any profits are shared and taxed. It also affects your liability if the venture goes wrong.

Typically, each party will have to sign a confidentiality or a non-disclosure agreement. You may also want to consider signing a memorandum of understanding early in the negotiations. This is a commitment to the deal and agreement in principle on the main points.

Changing your business model into a joint venture, or changing into a different type of venture, can be a challenging process. It is important to fully consider all of the joint venture advantages and disadvantages.

A joint venture is a common way of combining the resources and expertise of two otherwise unrelated companies. There are many benefits to this type of partnership, but it is not without risks - arrangements of this sort can be highly complex.

Advantages of joint venture

One of the most important joint venture advantages is that it can help your business grow faster, increase productivity and generate greater profits. Other benefits of joint ventures include:

• access to new markets and distribution networks
• increased capacity
• sharing of risks and costs (ie liability) with a partner
• access to new knowledge and expertise, including specialised staff
• access to greater resources, for example, technology and finance

Joint ventures often enable growth without having to borrow funds or look for outside investors. You may be able to:

• use your joint venture partner's customer database to market your product
• offer your partner's services and products to your existing customers
• join forces in purchasing, research and development

Another benefit of a joint venture is its flexibility. For example, a joint venture can have a limited lifespan and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

Joint ventures are especially popular with businesses operating in different countries, for example within the transport and travel industries. Read about the different types of joint ventures.

Disadvantages of a joint venture

Joint ventures can pose significant risks relating to liabilities, and the potential for conflicts and disputes between partners. Problems are likely to arise if:

• the objectives of the venture are unclear
• the communication between partners is not great
• the partners expect different things from the joint venture
• the level of expertise and investment isn't equally matched
• the work and resources aren't distributed equally
• the different cultures and management styles pose barriers to co-operation
• the leadership and 91Ï㽶»ÆÉ«ÊÓƵ is not there in the early stages
• the venture's contractual limitations pose a risk to a partner's core business operations

Partnering with another business can be complex. It takes time and effort to build the right business relationship and, even then, it can be difficult to completely avoid all the issues.

Success depends on good communication, a carefully planned joint venture relationship and a clear joint venture agreement.

When two businesses join their complementary skills and assets around a common goal, it's easy to envisage a good outcome. However, joint ventures don't always succeed. You should not enter one without careful consideration.

Any type of corporate partnership will almost certainly change the way your business works, so it is vital to:

• have a clear business rationale for change
• have alignment with your existing business strategy
• carefully select partners and structure of the partnership
• agree management, governance and decision processes early
• sufficiently plan for implementation, operations and exit contingencies

Careful planning and research is always the best place to start when implementing any change in your business. See how to plan your joint venture relationship.

Review your business strategy

It's important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. You might decide that there are better ways to achieve your business aims, perhaps through mergers and acquisitions.

Carry out a SWOT analysis

Before you enter into a joint venture, you should take some time to examine your own business performance. Be realistic about your business's strengths, weaknesses, opportunities and threats.

Consider performing a SWOT analysis to discover if the two businesses are a good fit. Seek a strong, credible partner that complements your own strengths and can contribute equally to the project. 

Manage change in your business

You should take into account your employees' attitudes and bear in mind that people can feel threatened by a joint venture. It can also be difficult to build effective working relationships if your partner has a different way of doing things. It may help to follow best practices in change management.

Examples of successful joint ventures

You may also want to look at what other businesses are doing, particularly those that operate in similar markets to yours. Seeing how they use joint ventures could help you choose the best approach for your business. At the same time, you could try to identify the skills they apply to partner successfully.

You should weigh up joint venture advantages and disadvantages before entering any type of partnership structure.

Before starting a joint venture, both businesses need to understand what they each want from the relationship.

Issues to consider when planning a joint venture

Normally, you will want to find a partner who is compatible with your business. This partner can be:

• a larger business - that can offer you their resources such as a strong distribution network, specialist employees and finance
• a smaller business - that may be more flexible, innovative or simply provide you with access to new products or intellectual property
• a supplier - who can offer you their knowledge of new technologies and a better quality of service, in return for a guaranteed volume of sales to you

As well as your own needs, you should think about what your joint venture partner will be hoping to get from the arrangement. You will need to agree on objectives that suit both of you. You will need to agree on things like:

• the structure of your joint venture
• who will manage the venture and how
• who will finance the venture and how
• the assets and resources you will both contribute
• who will own any intellectual property that comes out of the venture
• how you will share profits and any potential losses
• how you will handle any potential disputes

See how to create a joint venture agreement.

It's important to keep in mind from the start that joint ventures are generally temporary arrangements, and that they normally end when the objectives of the venture are met. You should plan your exit strategy from the beginning, to make sure you get a return on your investment in the joint venture.

Strategy for a mutually beneficial joint venture

Whatever your business aims, the arrangement needs to be fair to both parties. Any deal should:

• recognise what you each contribute
• ensure that you both understand what the agreement is expected to achieve
• set realistic expectations and allow success to be measured

The objectives you agree on should be turned into a working relationship that encourages teamwork and trust. 

The ideal business partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organisations.

Finding a suitable joint venture partner

A good starting place is to assess the suitability of existing customers and suppliers with whom you already have a long-term relationship. You could also think about your competitors or other professional associates.

When assessing the suitability of partners, you generally need to consider the following:

• How well do they perform?
• What is their attitude to collaboration, and do they share your level of commitment?
• Do you share the same business objectives?
• Can you trust them?
• Do their brand values complement yours?
• What kind of reputation do they have?

Consider carefully how you will plan your joint venture relationship with a potential partner.

Joint ventures - due diligence checks

When looking at new potential partners, you should carry out some basic due diligence checks. Start by examining their legal status and making sure that they have the right to enter the joint venture. You should also ask yourself:

• Are they financially secure?
• Do they have any credit problems?
• Do they own assets that they will be putting into the joint venture?
• Do they already have joint venture partnerships with other businesses?
• What kind of management team do they have in place?
• How are they performing in terms of production, marketing and workforce?
• What do their customers and suppliers say about their trustworthiness and reputation?

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Protecting your interests in a joint venture

Before you consider signing up for a joint venture, it's important to protect your own interests. You may want to choose and work with a solicitor to draw up legal documents to protect your own trade secrets and intellectual property rights. You may also want to check if your potential partner already has similar agreements in place, either with their employees or with consultants.

When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This agreement may help prevent any misunderstandings once the venture is up and running.

What goes into a joint venture agreement?

A written joint venture agreement should contain key terms around the formation of the joint venture, and the legal rights and obligations between the parties.

The joint venture agreement should cover:

• the structure of the venture, eg if it will be a separate business in its own right
• the name and aims of the joint venture
• the term of the venture and any possible extensions to the duration
• the capital contributions you will each make, such as cash or property
• circumstances where withdrawal of capital may be permitted, with or without consent
• the assets or employees you may transfer to the joint venture
• ownership of intellectual property created by the joint venture
• management and control duties, eg processes which both parties will have to follow
• the distribution of profits through dividends or cash payments
• the distribution of losses and liabilities
• how any disputes between the partners will be resolved
• an exit strategy for ending a joint venture

You may also need to agree on other issues, such as:

• confidentiality - to protect any commercial secrets you disclose 
• insurance - against loss where reasonable and especially if it is industry standard
• indemnification for both parties in the venture

Multi-party joint venture agreements

Multi-party joint ventures are generally very complex, particularly around corporate governance, supermajority requirements, dilution and exit rights.

Whether you are entering into a two-way joint venture or a multi-party agreement, it is essential to get independent legal expert advice before you make any final decisions on your joint venture. 

Download a template for a joint venture agreement (PDF, 17K).

Your business, your partner's business and your markets all change over time. A joint venture may be able to adapt to the new circumstances, but eventually, most partnering arrangements come to an end.

It is important to consider your exit rights and options, and to the circumstances in which the joint venture could terminate. To ensure a smooth exit, it is best to decide on your exit strategy and agree termination provisions early on in the process.

Exit plan for joint ventures

Typically, a joint venture is set up to handle a particular project with specific goals. Such a venture will run its natural course and end, with mutual consent, when the project is completed.

Depending on how you agree to end the venture, you could exit by:

• selling the assets
• listing the joint venture company on a public exchange
• transferring the interests from one joint venture party to another
• selling the interests to a third party

Most joint ventures dissolve through a partner buyout where one partner either sells their stake in the venture to the other partner or buys their stake from them.

It's always best for partners to mutually agree to the termination, but this does not always happen. For different reasons, one party may wish to exit unilaterally.

It is important to agree on possible issues in advance, such as the right of first refusal in the event that one partner chooses to sell their part of the business to a third party.

Sometimes, unexpected events or changes could trigger the exit prematurely. For example:

• a partner's default - if one party breaches the terms of the agreement
• a partner's inability to operate - eg impacting their contribution to the venture
• a deadlock - if parties fail to agree on an issue or a course of action

Within your partnership agreement, you should consider all the circumstances in which the joint venture may end to help you manage separation the right way.

A typical joint venture exit clause could include:

• requiring each party to give a three months' notice prior to ending the venture
• determining agreed 'walk-away points'
• allowing one business in the partnership to buy out the other
• agreeing when individual parties may be able to force a sale
• agreeing how parties will deal with deadlocks

Key considerations when terminating joint ventures

Your agreement should set out exactly what happens when the joint venture ends. For example, it should specify:

• how you will divide assets and profits
• how you will share intellectual property
• how you will continue to protect confidential information
• who will be entitled to any future income arising from the joint venture's activities
• who will be responsible for any remaining liabilities, eg debts and customer guarantees

Even with a well-planned agreement, there may still be issues to resolve. For example, you might need to agree on who will continue to deal with a particular customer.

Good planning and a positive approach to the negotiation may help you arrange a friendly separation. Find more tips to help you plan your joint venture relationship.

Joint ventures can be risky, but if you use the right processes and carry out due diligence checks, you can increase your chances of success. This checklist can help you prepare for and plan a successful joint venture.

Are you ready for a joint venture?

The first step is to decide if your business is ready for a joint venture. To help you do that, you should:

• research the activities of other businesses in this area
• carry out a SWOT analysis of your business
• compare your working methods with those of potential partners
• consult your employees to find out their feelings about a joint venture

Find out if your business is ready for a joint venture.

Choose the right partner

When choosing a joint venture partner, you should consider:

• existing customers and suppliers, competitors and professional associates as partners
• if the culture of a proposed partner fits with that of your organisation
• if the finances of the proposed partner organisation are sound
• potential for overseas sales or activities

Read more about choosing the right joint venture partner.

Financing a joint venture

You should prepare the following documents for a joint venture:

• business plan
• marketing plan
• cashflow projection

Each partner should agree who is investing what, and in what form - eg cash, services or other assets. If your venture needs external funding, the partners should agree:

• sources of funding
• who will borrow the funds
• how the borrowing will be guaranteed

You should also agree arrangements for profit and loss, eg:

• how any profits or losses should be divided
• how capital gains or losses should be divided
• if either party will be paid an additional share of profits, eg for providing services

See how to plan your joint venture relationship.

Implementing a joint venture

When you are ready to implement a joint venture, you should set out the terms and conditions of the partnership arrangement in a written joint venture agreement. This should include:

• clear business objectives and trading principles
• communication arrangements between organisations/teams
• financial arrangements
• protection of your interests, eg trade secrets
• day-to-day and strategic decision making
• if either party can pursue other business during the joint venture
• dispute resolution procedures

The written agreement should also specify the legal structure for your joint venture, eg:

• contractual cooperation for a defined project
• partnership or unlimited partnership
• limited liability company
• a full merger of the two organisations

Bank account arrangements will depend on the legal model you choose, although you can set up a new account for a single project. You should agree:

• in whose name account(s) are set up
• arrangements for depositing or withdrawing funds, including co-signatories

See how to create a joint venture agreement.

Sourcing business together

You should agree in advance which organisation has responsibility for different types of activities, eg:

• sales activities
• marketing activities
• new business generation

As well as agreeing on responsibilities for day-to-day running, you should also discuss who will be responsible for tactical and strategic decision-making.

Don't forget to consider what happens if there is a difference in opinion. Will certain things require approval of both parties to happen or will one partner have full control to make the call?

Terminating the joint venture

The agreement needs to make provisions for ending the joint venture. This can be if one party wants to pull out or if both parties agree to terminate. In either case, these provisions should cover:

• termination procedure or an exit strategy
• ownership of assets in the joint venture
• allocation of any liabilities resulting from the joint venture

See more on ending a joint venture.

A joint venture is when two or more businesses pool their resources and expertise to achieve a particular goal. A clear agreement is an essential part of building a good joint venture relationship. Here are some other key considerations.

1. Plan carefully

Every partnership should begin with careful planning. Review your business strategy to see if a joint venture is the best way to achieve your aims. Use our SWOT analysis example to consider the strengths and weaknesses of both businesses and see if your partner is a good match.

2. Communicate openly

Communication is a key part of building a relationship. Make sure that everyone involved understands the basics of the joint venture agreement, as well as the fine details, including goals, financial contributions, human resources and the expected length of the deal. It's usually a good idea to arrange regular, face-to-face meetings for all the key people involved in the joint venture. In some cases, you may have to legally inform and consult your employees.

3. Build trust

Sharing information openly, particularly on financial matters, helps build trust and credibility, and can prevent partners from becoming suspicious of each other. The more trust there is, the better the chances that your relationship will work.

4. Monitor performance

It's essential that everyone knows what you are trying to achieve and works towards the same goals. Establishing clear performance indicators lets you measure performance and set targets and can give you an early warning of potential problems.

5. Be flexible

With two companies making decisions, things can get complex even with simple projects. You should aim for a flexible relationship. Regularly review how you could improve the way things work and whether you should change your objectives.

6. Find a way to deal with problems

Even in the best relationship, you'll almost certainly have problems from time to time. Approach any disagreement positively, looking for 'win-win' solutions rather than trying to score points off each other. Your original joint venture agreement should set out agreed dispute resolution procedures in case you are unable to resolve your differences.

Forming a joint venture can be challenging, but if done right, it can be worth the effort. It can move your business in a positive direction and offer opportunities through increased revenue and reputation. Read more about joint venture advantages and disadvantages.