A joint venture is a business opportunity that is undertaken by two or more people, organizations, or parties that still retain their distinctive identities. The goal of a joint venture is to pool specific resources from all entities engaged to accomplish a specific goal.
Under the structure of a joint venture, every participant is responsible for the profits, the losses, and any costs which are associated with the project. At the same time, however, the venture will also become its own entity. That makes it separate from the business interests of all the participants.
A joint venture is technically a partnership. They can, however, be virtually any legal structure. Many joint ventures are corporations or limited liability companies. Formed with an agreement which outlines the rights and obligations of every involved party, it is a common structure used to explore new opportunities while limiting the personal risks involved.
Here are some of the key advantages and disadvantages of a joint venture to consider.
List of the Advantages of a Joint Venture
1. It provides a venue where multiple layers of expertise can be shared.
A joint venture makes it possible for multiple entities to combine their strengths together without regard to potential weaknesses. It is a way for each entity to gain a new insight into a market or specific areas of expertise. That makes it easier to understand future demographics, markets, and competitors. At the same time, you gain the opportunity to generate profits from an opportunity you wouldn’t be able to pull off on your own.
2. It gives you access to better resources.
If you pursue a lucrative opportunity on your own, then you are bound by the resources available to you internally or external acquisition. When you enter into a joint venture, you’re able to access skilled staff, needed equipment assets, and other common resources that you may not currently have. When these items combine with the capital you bring to the joint venture, everyone can take advantage of the pooled resources to push the project forward.
3. It doesn’t need to be a long-term solution.
Many joint ventures are started with the idea that they are going to be a temporary arrangement. You’re joining forces with other companies or individuals to create a specific result. That result can even be outlined in the joint venture agreement, creating a natural termination point for the relationship. Some joint ventures can even turn into successful corporations on their own, allowing you to spin it off with your partners into something entirely new.
4. It reduces the amount of risk that you face.
When you’re starting a new project, there are certain risks always associated with what you’re doing. Consumers might not recognize or accept your new product or service. Your branding might not resonate with your targeted demographics. You might even be at risk of eliminating the positive reputation your company has built over time. When you form a joint venture, you are spreading out the risks to everyone. If something happens and the project fails, you’ll only face a portion of the risk instead of all of it.
5. It reduces the cost commitment required.
A joint venture does more than spread out the risks. It also spreads out the costs. Say that you have an idea that will cost $10 million. If you went alone, then you’d be facing that entire cost. If you have three other partners willing to form a joint venture with you, then your total cost commitment would be 25%, or $2.5 million. Although that means your profit cut would also likely be 25%, this structure makes it easier to pursue ideas that might normally be too risky to explore because of the costs involved.
6. It creates opportunities for flexibility.
A joint venture can be operated as its own business entity. It can be operated as an informal partnership that is separate from other business ventures. It can be a short-term commitment or a long-term commitment. It can cover most of what you do already or cover a small portion of it. You can make a joint venture become as flexible as you want it to be. You’ll also always know what your portion of the joint venture happens to be, and you can sell it as an asset if you need to do so.
7. It offers multiple exit strategies.
One of the most common exit strategies for a joint venture is to sell the stake your control in it. About 4 out of every 5 exit strategies involves a sale from one partner to the other. You can also sell your stake to another outside investor who wants to get involved. You can have a termination point written into the agreement, creating a deadline which applies to everyone. That makes it possible to ensure that long-term agreements don’t happen unless you want them to happen.
8. It increases your network.
When you’re involved with a joint venture, you are gaining access to new markets, demographics, and customers that may not have been within your reach otherwise. As you build relationships with your partners, your branding benefits from the positive equity that they have with their consumer base. That process makes it much easier to enter new markets when your business has something to offer, along with the natural opportunities that are presented by joint venture in the first place.
9. It allows you to control the potential of the partnership.
With a joint venture, you’ll get out of it as much as you put into it. Although there are cases where some partners may not participate as agreed within the partnership, a joint venture is created because there are multiple parties seeking mutual success. You’re able to create momentum which takes you across the finish line. You can even create more joint ventures because you’re creating a reputation of success with the current one.
List of the Disadvantages of a Joint Venture
1. It requires an agreement with clear objectives.
One of the primary reasons that a joint venture falls apart is from a lack of clear objectives. The agreement which outlines the rights and responsibilities of each party must be outlined with specifics. If there are vague terms, responsibilities, or outcomes included, then one partner could take advantage of them at the expense of everyone else. You must emphasize clear, honest, and open communication from the very beginning to maximize the potential benefits of this partnership.
2. It is not always a flexible relationship.
Your joint venture agreement may require your company to be more involved in the daily operations of the partnership than what your business currently does every day. If you are committed to providing more resources to the venture than to your current customers, then the individual businesses engaged with the joint venture might fail. If those businesses fail, then the joint venture almost always fails too. That is why a balance must be struck, and the first priority must always be to the individual business.
3. It is difficult to structure an agreement with full equality.
The strengths of each entity within a joint venture often create unequal levels of equity within the agreement. One company might have manufacturing processes that can be used to develop a product. The second company might be responsible for the distribution network of the product, so it can reach the targeted markets. The third company might specialize in marketing. Which companies are taking the most risk? Those entities which are most involved with production and promotion tend to face the most risks in a joint venture.
4. It can expose an internal expertise imbalance.
If you enter into a joint venture, the agreement might call upon your company to provide a certain amount of expertise in specific areas. If there is one thing that a joint venture does well, it is to expose the weaknesses present in individual entities. When there isn’t enough expertise, asset availability, or investment opportunities available across all participating entities, then an imbalance in the partnership is created. If the imbalance is too strong, then the joint venture may never even get past the planning stage.
5. It can create a clash of cultures.
Every business has their own internal culture. When you combine the resources of multiple entities, you’ll have multiple internal cultures to consider. Some of those cultures may clash with each other. One company might promote casual dress, allow pets at work, and have unstructured hours. Another might require a 9-5 schedule, business formal dress, and have zero flexibility in how employees approach their work. Before forming a joint venture, it is important to compare cultures to see if any clash points can be resolved before they become problematic.
6. It may limit your future outside activities while involved.
Many joint ventures require the participants from being involved in other new outside activities while working on the project. If there are several different items you’re thinking about in your idea pipeline, jumping at the first joint venture proposal might not be the best way to go. At the very least, look to have this common stipulation removed from the agreement. If your partners won’t agree, then it might be better to wait or look for other opportunities to come your way.
7. It may be difficult to exit some joint ventures.
You might discover in the early stages of a joint venture that the partnership to which you’ve agreed is not as beneficial as you thought it would be. There might not be enough leadership coming from your partners. Their skills might have been overstated in the agreement. They may be refusing to provide their share of the resources. Even though this agreement is usually temporary, you may find that an early exit may be difficult, even if you’re willing to sell your stake at a discounted rate.
8. It requires partnership trust to be successful.
You can only legislate so much trust within the contract or agreement which governs a joint venture. There are times when your partners might decide to abandon ship, forcing you into litigation to recover your share of the venture. If the costs of litigation exceed what you would gain from getting your share, you might find that unreliable partners could be a costly experience. That is why performing your due diligence before entering any partnership is absolutely required.
9. It may create inadequate lines of communication.
This disadvantage tends to appear after the joint venture matures. When goals are being reached, different companies tend to react in a unique way. Some decide to stop communicating altogether, content with the results being achieved. If this happens early enough in the partnership, the lack of communication can lead to partner problems which might stop a potentially successful venture from maximizing its full potential.
The advantages and disadvantages of a joint venture make it possible for individual entities to come together, share risks, and reap rewards. Not every venture is successful. There are always risks involved that may shove some companies toward bankruptcy, even with the risks spread out. As with any financial decision, a complete look at every potential situation must be considered before finalizing any agreement.