In the context of joint ventures between business entities, the adage of “the whole is greater than the sum of the parts” has great relevance as follows: the whole is greater than the sum of the parts. Ideally, the synergy generated by the synergy between both parties can result in a joint venture that provides a stronger overall offering as a result of the synergy. Depending on which of the two sides brings a particular technology, the other may bring a brand or access to the market, or both may bring solutions that can be combined to make up a complete offering for the customer.
As a result of the wide variety of industries, venture types, and scales within India, joint venture agreement is commonplace across a vast range of business sectors. Take the example of the 50/50 joint venture between the retail giant Marks and Spencer and Ocado, which got underway about half a year ago, as an example. In return, Ocado granted Marks and Spencer access to its online market, and Marks and Spencer granted Ocado access to its hugely popular food range and loyal customer base. In early 2021, the venture saw a 40% increase in retail revenue as a result of the new deal.
Why do joint ventures work?
It has been confirmed in Deloitte’s research that businesses enter into joint ventures (JVs) for three primary reasons, every one of which provides benefits to the business. The first benefit of joint ventures is that they allow business entities to pool their resources, which lowers the overall company risk, gives companies greater access to capital (as investors and lenders can see the lower risk associated with the project), and gives them a greater market share. A pooling of resources may also be a way to reduce costs and improve the efficiency of your operations overall by reducing costs and using fewer resources.
Additionally, joint ventures facilitate access to new markets, whether they are in different regions or different product categories. The provision of rapid access to a new market with operational and delivery mechanisms already in place can lead to a considerable increase in both demand and sales.
In addition, a joint venture is a viable alternative to mergers and acquisitions, especially when financing is not available.
How does a joint venture agreement work?
JV agreements need to be drafted according to the type of venture and the shareholding arrangements of the partnership. There are several requirements that have to be fulfilled in order for a corporate joint venture to succeed:
- According to the association’s articles of incorporation
- As far as joint venture agreements (or shareholders’ agreements) are concerned,
Taking into account the importance of the JV agreement, it aims to establish in writing the fundamental rights and obligations of the parties involved in the venture, in order to ensure that the business formed as a result of this venture is run in a way that reflects their intention. There is also a description of what should be done if there are any problems during the course of the JV’s operation. As a minimum, a joint venture agreement must specify (as a minimum) the following information:
- In this section, you will find an overview of the objectives and scope
- A description of how the business will be funded
- An overview of the management structure and the board of directors
- What is the share of profits that will be allocated?
- Transferring shares is one of the methods used to transfer shares
- The provisions for unwinding a deadlock (in a 50:50 venture are described below)
- What can be done to terminate the JV if it is no longer necessary
- You might be restricted from doing some things if there are restrictions in place
There are a number of other documents which may be required according to the form in which the JV takes place, such as a management agreement, contract for the sale of assets, contract for IP rights, guarantees, property arrangements, and contracts for supply agreements.