Advantages & Disadvantage Of A Joint Venture

There are many good business and accounting reasons to participate in a Joint Venture (often shortened JV). Partnering with a business that has equivalent abilities and resources makes good sense. This includes finance, distribution channels or technology. These are just some of the reasons partnerships formed by joint venture are becoming ever so popular.

A joint venture is a strategic agreement between two or more individuals or entities to engage in a specific project or undertaking.

Partnerships and joint ventures can be similar but can also have major different implications for those involved. A partnership involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project.

Parties join Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product rather than joint or collective profits, as is the case with a general or limited partnership.

A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants. The joint venture itself has no legal status. Once the Joint venture has met it’s goals the entity no longer exists.

Here are the advantages and disadvantages of forming a Joint Venture:

ADVANTAGES:

• Provides companies with the opportunity to gain new capacity and expertise.
• Allows companies to enter related businesses or new geographic markets or gain new technological knowledge.
• Access to greater resources, such as specialized staff and technology.
• Sharing of risks with a venture partner.
• Joint ventures can be flexible
• In the era of deprivation and consolidation, Joint Ventures offer a creative way for companies to exit from non-core businesses.
• Companies can gradually separate a business from the rest of the organization, and eventually, sell it to the other parent company.

DISADVANTAGES:

Remember, it takes time and lots of effort to build the right relationship. Partnering with another business can be challenging at times.

Problems are likely to occur if:

• Objectives of the venture are not 100 per cent clear and communicated to everyone involved.
• There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.
• Different cultures and management styles result in poor unification and co-operation.
• The partners don’t provide enough skill and support in the early stages of the joint venture.
• Success in a joint venture depends on thorough research and analysis of the objectives.

Starting a Joint Venture can produce a serious rebuilding to your business. However favourable it may be to your potential for growth, it needs to fit with your business strategy.

You should always review your business strategy before committing to a joint venture. This should help show you what you can expect. In fact, you might decide there are better ways to go about your business goals.

You may also want to study up on what similar businesses are doing. These businesses are the ones that operate in similar markets as yours. Seeing how they use joint ventures could help you decide on the best approach for your business.

By studying your own enterprise, you can benefit. Be realistic about your strengths and weaknesses. Also, don’t be afraid to consider performing strengths, weaknesses and opportunities to identify whether the two businesses are compatible. You will almost certainly want to identify a joint venture partner that complements your own skills and your own failings.