What is an equity joint venture?

Written by grant houston
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What is an equity joint venture?
Creating an equity joint venture agreement takes agreement from two or more businesses. (Comstock Images/Comstock/Getty Images)

An equity joint venture (EJV) is an agreement between two companies to enter into a separate business venture together. The business structure for an EJV is a separate limited liability company (LLC). This shields each partner and business from liability. Each partner participates in gains and losses according to the percentage equity ownership they have in the joint venture. The purpose of the EJV is to diversify risk, provide capital-raising opportunities, reduce barriers to entry and create economies of scale while establishing a definitive time the joint venture exists.

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Deal Structure of the Equity Joint Venture

Structuring an EJV properly is crucial to protecting the businesses within the joint venture. The companies involved must structure a separate LLC and draft a joint venture agreement. The LLC is the legal business vehicle for the joint venture. The joint venture agreement sets forth the terms, conditions, definitions and ownership percentages of the joint venture as well as the responsibilities of each company within the JV. The agreement also sets the time period or life of the joint venture company.

Equity Ownership of a Joint Venture

Since the joint venture business structure is an LLC, the owners take their equity position in the form of "units," which are similar to stock. The units are distributed to the owners based on the percentage ownership stated in the joint venture agreement. The purpose of using equity is that it is the standard method for distributing ownership of a company. Equity ensures the partners share equally in gains and losses according to their agreement.

Objectives of the Equity Joint Venture

Equity joint ventures provide companies that are smaller the chance to combine forces to create a larger company without actually merging together. This allows them to take on larger projects than what they can do individually. Additionally, it reduces the risk to each company because the LLC in the new EJV is subject to all the risk. The EJV also provides access to more capital because banks and investors will look at the combined financial strength of both company's balance sheets and profit and loss statements.

Benefits of Equity Joint Ventures

Equity joint ventures are beneficial in lowering the barriers to entry -- high costs and specialisation required to begin business in certain industries or project. Each company can provide its area of expertise and bring in a portion of the capital and equipment necessary to complete the project. Combining forces also creates economies of scale, which drive down per-unit production costs. Lower production costs enhance margins and profits earned by each company that neither company could have completed alone.

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