Many times, businesses find that they need something they cannot provide in house and see the benefits of collaborating with another entity. This may be because the other business owns a process or component needed to produce a certain product, or has a sales and marketing network in a market that their business wants to enter. Whatever the reason, there may come a time when you need to work with another business to further your enterprise. This is why many business owners see the benefit of entering into a joint venture or strategic alliance with another entity. While many folks use these terms interchangeably, they are in fact different concepts. An experienced business attorney here in Pennsylvania can help you decide which is right for your company, and help you structure one to further your business.
The Key Components of a Joint Venture
The joint venture is a partnership between two or more businesses to achieve a specific objective, such as developing a new product. Each party to a joint venture will have determined that it does not have the capabilities to tackle the project alone. A joint venture entails the creation of a new business entity, such a limited liability company or corporation, that is jointly owned by these businesses. Each party will contribute a certain amount of assets to the joint venture entity, such as funding, technology, and intellectual property. In return, it will share in the profits and losses from the new entity based on its percentage ownership. At the end of the joint venture, the entity is dissolved and the assets of the entity are distributed to the parties.
The Key Components of a Strategic Alliance
Just like a joint venture, a strategic alliance is designed for two or more businesses to achieve a strategic goal by pooling resources in a way that could not be achieved if one of the entities tried to work alone. However, unlike a joint venture, there is no new entity created. Instead, the parties sign a legal agreement that sets forth the goals, shared resources, and responsibilities. While the result of a strategic alliance can be a common product, the parties will remain separate entities throughout the process.
The Benefits and Disadvantages of a Joint Venture
There are a number of advantages in setting up a joint venture. Each party will be able to get access to new markets and special expertise of the other parties. In addition, each party will share the costs and risks involved in the new business. This allows each joint venture member to apportion part of the risk so that no one party is solely absorbing the costs. It also can be more efficient to work through a new entity set up solely for the joint venture. Each party will assign certain employees to work for the new entity, so the people from each business can work in a collaborative fashion. Finally, setting up a joint venture gives you an entity that the parties could spin off, either by having it go independent or by selling it to a third party.
Even with these benefits there are a number of disadvantages to setting up a strategic partnership as a joint venture. There are costs associated with forming an entity, and also dissolving it at the end. There also may be culture clashes between the employees from each business that can stand in the way of the joint venture achieving its goals. This can often be caused by different managerial styles. You may run into a situation where you feel like the other businesses are not as committed to the goals of the joint venture. This can cause resentment. Finally, the joint venture entity may incur unforeseen liabilities that can harm each of the parties. This can be especially frustrating if the liabilities are related to the negligence or misconduct of another joint venture partner.
The Benefits and Disadvantages of a Strategic Alliance
A strategic alliance will often yield many of the same benefits of a joint venture, such as access to new markets and special expertise. However, you also avoid some of the disadvantages of a joint venture. You don’t have to incur the costs of setting up a new entity. Also, there is no need to dissolve the entity at the end like in a joint venture. All you need to do to end the strategic alliance is to terminate the contract under its terms. Finally, a strategic alliance will often avoid the culture clashes experienced by a joint venture, as it is clear that each person will remain an employee of their original business throughout the transaction.
Still, there are a number of risks with entering into a strategic alliance. It does not provide the level of control like in a joint venture, as each party will be acting autonomously. As a result, there is no way to control performance from the other parties like in a joint venture. This can lead to fears that trade secrets and other sensitive information will not receive adequate protection. For many businesses, these trade secrets are the most valuable assets. Finally, if you are unsatisfied with another party’s performance, your only options are to either terminate the agreement or sue for breach. This can be a long and costly process that dilutes any profits realized from the strategic alliance.
Contact Our Experienced Business Attorneys for Assistance With Your Next Joint Venture or Strategic Alliance
Setting up a joint venture or strategic alliance can be an excellent way to grow your company’s business, but it also has many risks. The experienced business attorneys at Jones, Gregg, Creehan & Gerace can help you decide if a joint venture or strategic alliance is the right choice for your business, and will help guide you through the process.