The ins and outs of joint ventures

Joint Venture Kenya: The ins and outs of joint ventures

Companies are often finding ways to make the most out of the resources they have. These can be done in many ways including joint ventures. However, not every business owner knows about this option. 

Don’t worry because the Joint Venture Kenya team can help you understand everything there is to know about this strategy. Browse through the website to find out how you can expand your Kenyan business in the best way possible. 

What is a joint venture?

A joint venture in its simplest definition involves two or more businesses pooling their resources together and expertise to accomplish a specific task. This isn’t limited to business activities because it can also involve new and specific projects that the company might be interested in. 

This type of business strategy is an entity of its own. It can be done specifically for that purpose or it can also just simply grow out of a contract between two parties to further expand what they want to accomplish. 

Much like an order form, a joint venture agreement is almost always temporary. After the task is completed or the agreement has been fulfilled, the contract dissolves. 

The joint venture agreement

For the agreement to fully materialise, two or more parties or business entities must enter a contract that outlines what the business activity or project would be and what resources each entity will allocate. This can be money, properties, services or any other assets that can fulfil the end goal of the project. 

Moreover, the contract of the venture should establish how the project will be managed and which individuals or groups would manage this contract to fulfilment. 

Sometimes, businesses or companies from different sectors or expertise work together in joint ventures. That’s because one can bring something to the table that the other can’t and vice versa. This way, there’s an equal distribution of tasks that can help complete the project or business activity. 

How does a joint venture work?

Expanding on what’s mentioned above, joint ventures are entities of their own that sprung from the agreement of two or more entities or parties. That contract will only cover responsibilities that the concerned parties have for each other within the contract. Any legal obligations beyond the scope of the contract will not be honoured. 

This just means that the parties concerned will only move forward according to what the contract or agreement states. They are legally bound to each other only in the scope of what the project is. Anything other than that wouldn’t fall on the shoulders of the company. 

After all, these companies or parties are separate entities with other projects and business activities outside the venture. 

The characteristics of a joint venture

To learn more about joint ventures, you’d need to find out the characteristics that would make a contract qualify for one. These conditions vary depending on what the project is but should still fulfil the following criteria:

  • Parties or companies that would enter the agreement should be legally independent of each other. This just means that they should have been established as a business entity or anything of the like before they go on a venture contract. 
  • The goal that’s set by the parties involved should accomplish something specific and mutually beneficial.
  • All the parties involved should be able to contribute resources, share ownership of assets and liabilities as well as share the implementation of the project. However, joint ventures can implement contributions that are not equal. This depends on the agreement between the parties and the portion that they receive from the whole deal. 
  • Whether it’s a long or short-term goal, the venture should be temporary, dissolving once the goal is accomplished. 

Aside from these characteristics, a joint venture agreement should also include the following items in the contract:

  • The involved parties to the agreement;
  • The management structures and members of the venture;
  • The percentages of ownership per party involved;
  • The distributive share as well as the percentage of profit and loss that’s allocated for each party;
  • The bank details that the venture will be using for the project or business activity;
  • The list of resources to be allocated for the whole venture;
  • The list of employees and contractors that are assigned to work on the venture;
  • The logistical strategy on how to handle the administrative records and financial statements; and
  • Which laws will be applied to the venture.

Structures

Although in essence, a venture is an agreement between two or more parties, there are still differences in the types of this contract. This depends on what you are trying to achieve for the project or business activity. 

Knowing the differences between the types of joint ventures helps narrow down how you can accomplish your goal for the business. Here are some of the structures that you should know about:

Project joint venture

This is the most common type of joint venture since it is created for the sole purpose of completing a project per the agreement of the contract. Most of the time, this is used for construction projects like creating a building complex or rebuilding a road. 

Once the project is completed, the venture comes to an end and automatically dissolves. This just means that upon the completion of the project and after the assets are distributed properly, there’s no need for the involved parties to work together unless there’s a completely new venture that’s signed by them. 

Functional joint venture

Businesses with different expertise opt for this joint venture agreement to help one another. This creates a symbiotic environment wherein one party can benefit from the other and vice versa. 

The functional joint venture can be long term or short term depending on what the goals of the parties are. As long as they’re able to create a symbiotic relationship wherein they give and take from one another, the venture will work until the goal is fulfilled. 

Vertical joint venture

For joint ventures between two or more business entities in the same supply chain, this agreement is done. This works in a way that one of the entities produces or supplies a certain kind of product by which the other entity needs to create its own products.

To make this work, one of the business entities would invest with the supplier to develop and maintain the capacity of the production. This avoids any problems with the unavailability of the supply so that the production line does not encounter any deterrents. 

Horizontal joint venture

This is similar to the vertical joint venture since the entities involved also belong to the same industry that provides similar goods and services. The difference lies with the goals are that’s supported by the venture. 

For the horizontal venture, one of the business entities is a local company that’s aware of the geographical logistics of the market while the other is focused on the global bottom line. 

Main reasons for joint ventures

Joint ventures are beneficial for businesses no matter how big or small they may be. That’s because it fulfils a goal that would otherwise be impossible without the help of a different business entity. 

Plenty of reasons can be said as to why some businesses enter joint ventures. Below are some of the examples of why certain parties or business entities opt for this kind of agreement:

Leverage resources

Both parties can benefit from a joint venture because they leverage the resources that each one can contribute. One of the entities may have a disadvantage that the other can fulfil or vice versa. For example, one company can have a well-established manufacturing process while the other has a good distribution channel. This can help maintain the goal that those parties might have. 

Save money

The companies or business entities in the agreement may have joined forces to cut some of the overhead costs for a certain project. By using the economy of scale, it’s easier for these companies to leverage their production to a lower cost because they are working together instead of competing and doing the work separately. 

From labour costs to sharing advertising budgets, there are several ways that a joint venture can help lower overhead costs. This all depends on the goal they are trying to accomplish. 

Combine expertise

A joint venture can also be an avenue for the involved parties to combine their expertise and create a better and more refined production process rather than doing everything by themselves. Each of the entities that are involved can benefit from one another and profit from what they offer to the customers. 

However, in this kind of joint venture, it’s important to lay down the ground rules for the rights and obligations of each involved party. This should also involve the responsibility for losses in case these happen during the whole production process.

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