Is a Joint Venture The Right Choice For Your Business? A joint venture between companies can open the way for expansion into a new line of business by each participant at a relatively modest cost. In fact, it sounds ideal: Each company contributes its own expertise, but the cost of the venture is split among them.
It’s only ideal, though, if the companies have a shared vision and an equal commitment to the success of the joint venture.
What Is Joint Venture?
A joint venture is a business arrangement where two or more parties work together on a common goal. Each party in a joint venture agrees to put their resources together on a particular project. The resource could be in form of knowledge, expertise, or tangible and intangible assets.
A joint venture in real estate is a system where two or more entities partner together on a real estate project which could range from building residential and commercial properties to erecting social infrastructures.
Commonly in real estate joint ventures, one party may be in charge of providing the land to build on while the other party manages the funding and execution of the project from start to finish. Both parties operate on a pre-agreed term to determine how profit is shared at the end of the venture project.
Why do companies form joint ventures?
- To Leverage Resources
A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.
2. To Reduce Costs
By using economies of scale, both companies in the joint venture can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technological advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising, business supply, or labor costs.
3. To Combine Expertise
Two companies or parties forming a joint venture might each have different backgrounds, skill sets, or expertise. When these are combined through a JV, each company can benefit from the other’s talent.
4. To Enter Foreign Markets
Another common use of joint ventures is to partner with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can enter into a JV agreement to supply products to a local business, thus benefiting from an already-existing distribution network.
Some countries have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.
Advantages and Disadvantages of a Joint Venture
Advantages
A joint venture gives each party the opportunity to exploit a new business opportunity without bearing all of the cost and risk. Joint ventures, by nature, are riskier than “business as usual,” and competition and sharing the risk is a wise move.
If the right participants are involved, the joint venture also starts out with a broader base of knowledge and pool of talent than any one party possesses on its own.
For example, a joint entertainment venture set up by an animation studio and a streaming content provider can get off the ground quicker—and probably with a better chance of success—than either participant could alone.
Disadvantages
Embarking on a joint venture requires relinquishing a degree of control. The vital decisions are being made by two or more parties.
The companies involved must go into the project with the same goals and an equal degree of commitment.
Extreme differences between the participants’ company cultures and management styles can be a barrier to success. Will the executives of an animation studio be able to communicate in the same language as the executives of a digital streaming giant? They might, or they might line up in opposing camps.
Setting up a joint venture multiplies the number of management teams involved. If one party undergoes a significant change in its business structure or executive team, the joint venture can get lost in the shuffle.
CONCLUSION
A Joint Venture is a lucrative business agreement for any company that wants to enter a new geographical location. However, it is prudent to understand the laws and also to find a great partner with a good understanding and great relation before setting up.
