How To Start A Joint Venture: A Guide For Government Contractors
As they say, two heads are better than one. That is why government contractors—especially small businesses—who want to upscale their business capabilities enter a joint venture agreement.
What is a joint venture?
A joint venture agreement or JV is an arrangement between two or more businesses to team up to accomplish a particular business goal. A joint venture may be formed to fulfill a project or business activity, such as when a foreign company wants to enter the local market. Joint ventures may only be temporary, but businesses can enter a JV agreement for short-term or long-term undertakings.
Depending on the nature of the agreement, a joint venture arrangement can be structured as a separate legal entity or just exist as a contractual relationship. Unlike a merger where the participating companies cease to exist to form a new entity, a joint venture allows the original companies to operate individually.
What are the different types of joint venture agreements?
There are four major types of joint ventures, which are as follows:
Project Joint Venture
As the name suggests, a project joint venture is an arrangement used by companies who want to achieve a particular project. Under this type of joint venture agreement, participants will pool their resources for the task. Once the project is completed, the joint venture will be dissolved.
Compared to other types of joint ventures, a project joint venture has a defined goal and deadline for its completion. Given how clear-cut this arrangement is, the project joint venture is the most common form of JV agreement.
Function-Based Joint Venture
Companies enter into a function-based joint venture when they can mutually benefit from the products and services their joint venture partner offers. If both companies successfully synergize, they can increase their companies’ efficiency and effectiveness.
Companies operating in different industries usually undertake this type of joint venture agreement. For example, Company A has a fleet of trucks and Company B offers storage solutions. Entering into a joint venture can help cut Company A’s costs of managing storage, and Company B will have access to a more affordable transport crew.
Vertical Joint Venture
Contrary to the previous type of joint venture, a vertical joint venture occurs when businesses belonging to the same supply chain enter into an agreement. This type of joint venture is more common among the buyers and suppliers within the supply line.
Usually, companies enter this type of joint venture agreement to avoid the uncertainty of supplies and maintain the movement in the supply chain. To better understand this arrangement, take this scenario: Company A, a furniture maker, enters into a joint venture with Company B, a supplier of raw materials needed to make the furniture. This JV will ensure that Company A will have enough materials to keep up with the demands, and Company B will have a consistent buyer for their materials.
However, this type of joint venture may encourage unjust market practices such as monopolization. To avoid this, certain business regulations are put in place by the federal government.
Horizontal Joint Venture
Compared with the vertical joint venture, where businesses maintain a buyer-supplier relationship, competing businesses are the participants of the horizontal joint venture. It may seem mind-boggling to imagine why companies offering similar products and services are entering a joint venture, but this usually happens when both companies are looking to expand into foreign markets.
For example, Companies A & B are pharmaceutical companies that reside in the U.S. and U.K., respectively. Company A wants to expand its business to the U.K. while Company B enters the U.S. market. The risk of going through this endeavor alone can be costly. But, by entering into a joint venture, both the companies can cut their losses and gain the opportunity to sell their products in new markets.
Joint Venture: Pros and Cons
Advantages of Joint Venture
Less financial burden
Under a joint venture agreement, companies pool their resources to achieve their common goal. From monetary to human resources, forming a joint venture helps minimize the risk and cost associated with upscaling business.
Entering a new market, developing a new product, and bidding for a government contract is a huge undertaking, especially for an ordinary small business owner. That is why joint venture isn’t a closed-off territory for big players only—even small businesses stand to gain so much with this business structure.
Access to a pool of talents
Training and scouting for professionals to upscale the business’s capabilities require serious investment. However, not all small business leaders have the luxury to do that. Fortunately, joint ventures can bring down this barrier.
Each company can pool in its team of talents who possess the technical expertise and knowledge for a successful joint venture.
Diversify distribution channels and enter new markets
Small business owners are always faced with a giant wall that prevents them from dubbing into new markets or finding new revenue streams. But joint venture business owners can jump over these hurdles pretty quickly.
For example, two companies may sign into a horizontal joint venture to help each other enter each other’s markets. Company A, which is headquartered in the U.S., can enter the U.K. market thanks to Company B, and vice versa. Through a joint venture, both companies can expand their business internationally and diversify their portfolio.
Increase overall profits
The goal of every joint venture is to create a mutually beneficial environment for all parties involved. By pooling their resources, they will have more opportunities to grow their business—and increase their profits.
Small business government contractors that enter into a joint venture agreement with more prominent companies can overcome their struggle with resource scarcity. With more wriggle room for growth, small businesses can bid and win more government contracts.
Protect and profit intellectual property
The federal government is bolstering its IT capabilities and is projected to continue in the succeeding years. It is profitable to be a federal IT contractor now, but the resources needed to be one can be too steep for a small business federal contractor.
For this type of case, a small business entering into a joint venture agreement with a tech-rich company can help them out. The small business can take advantage of their partnership to gain access to advanced technology, while the joint venture partner can use this opportunity to qualify for more government contracts.
In the government contracting industry, reputation is king. An esteemed reputation and solid customer base can increase the winning rate for federal contracts. However, establishing this kind of standing in this industry takes quite a long time.
This can take a toll on small businesses that are still starting. Fortunately, forming a joint venture with a well-reputed company can help speed things up.
Disadvantages of Joint Venture
Conflict in business goals
A joint venture business partnership might fall through the cracks if the participating entities fail to set clear goals and expectations. Different objectives mean that the companies will have different success metrics for the JV. And having different success metrics means that the joint venture will have no unified course of action.
To prevent this from happening, create a written agreement contract setting out the goals and objectives, KPIs, and scope of work.
Cultural and management style mismatch
Joint ventures bring different companies together to work for a common goal. However, introducing a new cog into the mix may threaten the harmony and balance of the company. From cultural mismatch to management style differences, these factors may lead to poor integration and discourage cooperation between participating companies.
Before entering into a joint venture agreement, it is best to get to know each other first to test the companies’ synergy.
Imbalance of power
Conflicts may arise when two companies with different levels of investment, assets, and expertise enter into a joint venture. This power imbalance may give rise to a feeling of unfairness, especially when one party contributes a bigger portion than the other, yet the profits they earn are not proportionate.
This issue can be resolved through clear communication throughout the entire joint venture partnership.
Who can enter into a joint venture partnership agreement?
Regardless of the present business structure of the government contractors, they are eligible to form a joint venture. The JV exists separately from the businesses of the JV participants. Even if one participant runs a sole proprietorship business and the other a Limited Liability Company (LLC), it is still possible to form a joint venture under these circumstances.
How to start a joint venture as a government contractor
Assess business readiness
Joint ventures can accelerate a government contractor’s growth within the federal contracting industry. Given how the industry is riddled with complicated procedures and bureaucratic walls, forming a joint venture can ease this up. However, entering into a joint venture is a serious undertaking. It can either boost a company’s success or impede its growth if executed poorly.
Before becoming a qualified joint venture, it is critical to assess the preparedness of the business, such as:
Review the business plan
This is the stage where a business leader should ensure that forming a joint venture is aligned with the business’s goals. During this stage, the joint venture’s goals and expectations should also be laid out.
There are other business structures that may be more beneficial for the business. Keep an open mind in this phase to know the right business structure for the company.
Perform a SWOT analysis
Also known as the Strengths, Weaknesses, Opportunities, and Threats analysis, conducting this study will help refine the business goals and expectations that were set previously.
Study about change management
A joint venture will bring significant changes to a company, and neglecting to assess the behaviors and opinions of the employees, especially the management team, may give rise to conflicts.
Gather references about successful joint ventures
Taking inspiration from successful joint ventures can help identify the best practices and business approaches to take. Stay tuned for the latest joint venture and government contracting news here, and subscribe to the Potomac Officers Club newsletter.
Plan the joint venture relationship dynamics
After setting down the goals and expectations of the company for a joint venture, the business should also know what it can bring to the table. Here are some guide questions that may help:
- Who will represent the company in the joint venture? Is this the same person who will be on top of managing the joint venture?
- What is the management plan for the joint venture?
- What are the resources that the company can contribute to the joint venture?
- Who will own the intellectual property developed during the joint venture?
- How will the profits and expenses of the joint venture be divided among the participating businesses?
- How will future disputes be handled?
Choose the best joint venture partner
To reap the benefits of a joint venture, finding the right business partner that synergizes well with the company is essential. Otherwise, the joint venture is doomed to fail.
There are countless businesses that are eligible to be joint venture partners. But to help narrow down the choices, here are some of the things that should be considered:
- Does the company share similar business goals and levels of commitment?
- Are the key decision-makers of the company trustworthy?
- How stable are the company’s financial resources?
- What is the company’s credit score? Do they have problems managing their credit?
- Does the company own the assets they pitch to contribute to the joint venture?
- Do they have any ongoing joint ventures with other companies? If so, what is the status?
- What type of culture and management style does the company have?
- How is the company handling its production, employees, and marketing efforts?
- What is the company’s reputation among its customers? If applicable, what is the general consensus of businesses that have entered into a joint venture with the company?
Draft a joint venture agreement
The joint venture agreement, or JV agreement, is a legal document that will bind both entities. This document will reflect the terms and conditions of the joint venture and prevent any misunderstandings that may arise in the future.
Here are the key elements of a joint venture that should be taken note of:
- Structure of the joint venture (contractual relationship or establish a separate entity)
- Objectives of the joint venture
- Timeline of the arrangement and possible contract extensions
- Resource contributions of each participating entity
- Asset transfers, including any financial, material, and human resources that will be shared during the joint venture
- Ownership of intellectual property (who will own the IP developed during the joint venture and how the profits will be distributed)
- Division of management duties
- Division and distribution of profits, losses, and liabilities
- Agreement for dispute management
- Exit strategy
- Confidentiality Clause (to protect trade secrets shared during the joint venture)
- Insurance Clause (to prevent the company against any unforeseen circumstances)
- Indemnification Clause
As a best practice, hire a legal team to ensure that the company is covered on all bases.
Prepare an exit strategy
Joint ventures are all temporary business arrangements. If a joint venture was formed for a project, it would end as soon as it has been completed. If the arrangement is open-ended, there should be measures for termination or withdrawal.
During this time, the withdrawing company may sell its part to the other parent company.
Here are the things that should be considered for the company’s exit strategy:
- Confidentiality – how will the participating companies protect the commercial secrets shared during the joint venture?
- Intellectual Property – how will the entities involved in developing the IP produced during the joint venture will be managed?
- Business Income Division – how will the companies receive and distribute the future income generated from the joint venture?
- Liabilities – how will the ongoing liabilities, debts, and services be managed?