Forming a joint venture means that two or more parties can help to create an alliance that helps one another be able to achieve more than one could do on their own. Rather than a formal business structure, joint ventures combine resources and abilities in a strategic manner so that each independent business can better position themselves in their industry niche. It can be either short- or long-term in nature and everyone receives group and individual benefits.
As with any agreement made today, there are joint venture pros and cons that must be evaluated before agreeing to anything. Here are some of the key points to consider.
The Pros of a Joint Venture
1. Businesses are able to gain new expertise and additional capacities without any investment.
In such a strategic alliance, every business involved gets access to the capabilities that everyone else in the agreement happens to have. That means that no investment may be required to expand expertise for a specific project or new capacities might be made available at a much more affordable rate than trying to expand in-house.
2. It becomes easier to enter into new markets.
A strategic alliance is the perfect way to enter into a new market or target a new demographic with goods or services. One business can use their reputation within the market to expand the reach of their joint venture partner to expand their own individual influence. It is a very affordable way to test new ideas, establish more brand awareness, or expand into mass market opportunities.
3. Joint ventures are remarkably flexible.
A joint venture can be an agreement that lasts as long as it needs to last. It can be used for an individual project or be a long-term arrangement. Because there is no financial burden or risk associated with most alliances like these as it is not a separate legal entity, as long as improved revenues are flowing through the joint venture to each individual participant, it can stay in existence.
4. Venture partnerships can just a joint venture to share risks.
There can be a lot of risk in the modern business world. Under a joint venture, an alliance can be designed where risks for a new project can be equally shared. This limits individual liabilities for each business, yet provides each with an opportunity to expand their overall footprint at the same time.
5. Shares of a joint venture have tangible value.
It isn’t uncommon for a joint venture to end in a sale. Most partners will sell to another after a project has been completed. The sale is usually made to what is known as the “parent” company, or the one that initiated the relationship in the first place. This allows the other party to profit from the sale and make money during the collaboration period as well.
6. Taxation can be passed to personal income instead of remaining as company profits.
Instead of dealing with business taxation rates, any income that comes from a joint venture business structure can be paid at personal income rates. Business losses from the venture can even be used to offset profits that are obtained from other revenue sources. This means self-employment tax rates, however, but it eliminates a complete double taxation of profits made. Losses can even be carried over in some specific circumstances.
The Cons of a Joint Venture
1. Clear communication is 100% necessary for a joint venture to work.
Because joint ventures are task-orientated, communication is essential for it to be successful. If two partners are working together, but headed toward two very different goals, then the partnership that was formed can break down quickly and be very costly to everyone involved. If there isn’t an effective way for everyone to accurately communicate, then nothing good is going to happen.
2. Expertise might be one-sided.
Joint ventures are formed to share mutual expertise and resources. The only problem is that some companies try to shortcut this process by creating a joint venture in an area where they have zero expertise. The same is true from an investment standpoint, an assets standpoint, or even from a structural standpoint. A joint venture must be balanced on both ends if it is going to succeed. As soon as the balance gets thrown off, then problems are very likely to arise.
3. Cultural differences can have a negative impact on the joint venture.
Even though the world is a global economic hub today, there are still local cultural differences that can have a dramatically negative effect in a joint venture. Even different workplace cultures or a different style of business leadership can be enough to throw a joint venture into difficulty. This is why it is so important to build a relationship with a potential business first before jumping head-first into an alliance.
4. Leadership gaps may form.
When two businesses come together in a joint venture, there must be an outline of which leadership responsibilities will be given to whom and when they must be enforced. Without detailed outlines of job expectations of everyone in a leadership role, one of two results will happen. A leadership gap will form because no one is willing to take responsibility over an expanded role or leaders will begin to step on one another with different visions because the recognize there’s a gap that must be filled.
5. An emphasis on research and analysis must be part of the process.
Without ongoing research, there cannot be any new innovation. Without new innovation, there is no feasible way for a joint venture to continue on. The issue here is that one partner in the alliance may be depending on the research or analytic capabilities of others within the group. That means they get to reap rewards without any real investment and at best, that creates hard feelings. At worst, a joint venture can fall into litigation.
6. Written agreements are absolutely necessary.
The days of operating under a handshake and a person’s word are long gone. Joint ventures often see conflict creep up when it comes time to make a tough decision. Without a written agreement dictating the specific responsibilities each party must take, then a disagreement could tear the relationship apart or leave the door open so that many different conflicts can arise in the future.
The joint venture pros and cons show that there are many benefits to having a strategic alliance with another. They also show that it is important to document everything in today’s world and form relationships with others before forming partnerships. By proceeding carefully and keeping the relationship balanced, a joint venture has the potential to lead to a tremendous amount of success.