A Joint Venture (JV) is a partnership formed by two or more individuals or entities that agree to work on a project which is a mutual benefit for all parties. It is a great way to grow a company and expand into new business segments quickly. Joint ventures are suitable when two entities have similar customers and if there is a project that can be carried out successfully only when the two individuals or entities combine their expertise. This form of partnership is better than an acquisition or merger. It is an amicable agreement that offers full access to the needed expertise.
A joint venture is the best way to pool resources to increase productivity and achieve strategic business goals. Joint ventures are good, but there are always some side effects associated with this form of partnership. Let’s look at the pros and cons of a joint venture to understand better on when to consider this form of agreement. If you face some of the disadvantages of a joint venture, you may want to consider a business lawyer to help you resolve the legal issues on agreeable terms.
The following are ten joint venture pros and cons:
1. New expertise and combined experience
By the two or more individuals and entities forming a joint venture, they can bring together highly qualified personnel to work on a specific project or business venture. Both parties gain valuable insight, know-how and practices. They can capitalize on specialized technology and each other’s strengths.
2. More resources
The joint venture increases the resource pool including the capital and equipment needed to achieve a business goal or deliver a winning project.
3. Share risks and costs
Sharing the risks and costs of a project or business venture is easy with a joint venture. Both parties volunteer to share expenses and manage any losses incurred. This prevents a heavy burden for one party to bear.
4. Temporary and amicable
This form of agreement is not permanent. Organizations or individuals can benefit from the arrangement and then continue their separate ways after sharing profits and achieving business goals. No ownership is lost in the process.
5. Fast business growth
Joint ventures enable growth without having to seek a bank loan. Through a joint venture, organizations or individuals can easily access new geographical markets. The combined entity can overcome entry barriers and weaknesses when exploring new business opportunities. Entities under a JV can focus on what they do best and at the same time learn about their target customers and product or service positioning in the market. A JV ends up being a win-win situation for the parties involved with maximum profitability through shared resources. It can encourage a new revenue stream for all parties involved.
6. Different working methods and management styles
Every organization has a different style of working along with a distinct corporate culture. These differences can impact operations and collaboration on achieving combined business goals or projects. Another issue is when there are imbalanced levels of expertise offered.
7. Lack of commitment
There is a possibility of weak obligation by either party. One party may not provide necessary or equal funding and resources. The organization or individual that is not committed probably has different objectives for the joint venture.
8. Misunderstanding and conflict
Conflict with JVs is one of the most significant disadvantages. If the line of communications is not strong, then there is a huge potential internal dispute between the parties involved. Lack of communications can result in problems early during the JV which can prevent both parties from reaching the set goals. Conflict also arises when the parties disagree on how to manage the joint venture’s business affairs. These misunderstandings can lead to mistrust, missed milestones, dissatisfaction and collaborative failure.
9. Unclear objectives
A joint venture can quickly fail without proper goals assigned to each party or when objectives are not communicated clearly. The agreement should specifically outline the responsibilities of each party. When the JV is in operations, it is essential that both parties foster honest and open communications to maximize the benefits of the JV agreement.
10. Difficult to exit
After the JV is formed, both parties may realize that the agreement is not beneficial and may not prove to be lucrative. Parties involved disagree on the future direction of the venture or how the JV operates. At this point, it is challenging to dissolve the agreement. This situation may result in litigation to recover the profitability achieved until this point. It is always important to carry out due diligence before entering into a joint venture. To avoid a painful exit, you may want to ensure you approach a lawyer to develop an agreement that makes the dissolving process simple.