Joint Ventures Vs Selling a Business – Which One is Right for You?

Business owners considering growth strategies, succession planning, or strategic alliances often face trouble understanding the difference between joint ventures and sale of business. These two alternate paths have very significant financial and operational implications, with vastly diverse commercial and legal implications.

In Australia, it is essential to know the goals of every strategy and the legal structures that underpin them. Selecting the most appropriate structure relies on your long-term business ambitions, desired level of control, and risk tolerance.

About Joint Ventures in Australia

A joint venture is a type of business relationship between two or more entities that agree to share assets to acquire a specified objective within a limited period. A joint venture is not an acquisition, nor is it a merger, because all participating organisations are independent, as they have the experience, capital, or access to markets that the others may not. Read – Merger and Acquisition Differences

Flexibility is the most advantageous aspect of a joint venture. Both parties contribute their inputs according to the agreed-upon agreement and retain their legal existence.

Joint ventures in Australia are either incorporated or unincorporated. Incorporated joint ventures involve the formation of a new company, whereas contractual arrangements between the parties regulate unincorporated ventures.

These kinds of structures are prevalent in industries like technology, construction, and mining, where the pooling of resources can reduce expenses and enhance market access.

About the Sale of a Business in Australia

The sale of a business is a transfer of property and ownership in whole or in part from one person to another. The property sold may be physical, such as premises and equipment, or abstract, such as intellectual property, customers’ databases, and goodwill.

Both buyers and sellers employ this to diversify their business, attract new customers, or enter new markets. In the context of joint ventures, however, selling a business provides a cleaner break and a more complete transfer of ownership and risk.

Control and Decision-Making – A Key Distinction

One of the distinguishing features between a joint venture and the sale of a business is the management of decision-making authority. The decisions in a joint venture are made jointly as provided in the joint venture agreement. This can be helpful in leveraging disparate skills, but can hinder execution due to having to achieve agreement.

On the other hand, after selling a business, it is natural that the buyer takes full charge of operations, strategy, and employees. To be able to do this is helpful in instituting core changes, but also hard when it comes to continuity in employees and retention of customers.

Entrepreneurs should consider this variation in control. Those who wish to maintain some control will opt for a joint venture, whereas those who wish to exit entirely will opt for a sale.

Tax Implications of Joint Ventures vs. Business Sales

The joint venture tax is also quite different from a business sale. For joint ventures, both parties’ taxes are levied on their share of income and expenses on a separate entity basis. It offers more flexibility but needs to be properly reported and coordinated financially.

Capital gains tax (CGT) on the disposal of a business is a significant factor to consider for the vendor. That said, CGT concessions can apply, especially where the business is a small business under the Australian Taxation Office (ATO). Buyers may also need to account for GST on the transaction unless it qualifies as a going concern.

Determining these tax implications upfront can impact the structure of the deal and enable both sides to realise improved financial results. Hiring accountants and a Commercial Contract Lawyer Perth will help you to align commercial and tax strategies of transactions effectively.

When is a Joint Venture the Better Option?

A joint venture may be the best solution when

• The parties want to share the risk
• Pool expertise
• Testing a market before acquiring it outright

It is especially useful in ventures where there is no guaranteed payoff or where each brings complementary strengths.

Joint ventures work best when there is a mutual and open goal, timeline, and understanding of exit conditions. Misalignment in these areas can lead to tension and hinder the venture’s success.

When a Business Sale Makes More Sense?

On the other hand, a sale of a business is more suitable when

• One owner wants to exit completely
• When a buyer wants complete control of the operations

It injects capital into the seller upfront and is usually a quicker path to market for the buyer. Although there is greater initial legal and financial effort, the absolute certainty and finality of business sales give an extremely high level of direction to all parties. Establishing asset and liability valuations is easier, and thus, the bargaining process is simpler.

Conclusion

The sale of the business and a joint venture ultimately depend on your business objectives, hunger for control, financial situation, and long-term vision. Both alternatives have strategic benefits but also special risks and obligations.

Whether or not you plan to partner or sell out, having the guidance of seasoned financial and legal advisers, such as sale of business agreement lawyers Perth will keep your interests safe and get the deal completed. Either way, planning will make either decision a smart move as an entrepreneur.