A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests
Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners’ rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits and/or the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.
What a Joint Venture May Look Like
1. The number of parties involved
2. The scope in which the JV will operate (geography, product, technology)
3. What and how much each party will contribute to the JV
4. The structure of the JV itself
5. Initial contributions and ownership split of each party
6. The kind of arrangements to be made once the deal is complete
7. How the JV is controlled and managed
8. How the JV will be staffed
Top 10 Advantages of Joint Ventures
A joint venture offers several advantages to its participants. It can help a business project grow faster, increase productivity, and generate additional profits.
1. Shared investment
Each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.
2. Shared expenses
Each party shares a common pool of resources, which can bring down costs on an overall basis.
3. Technical expertise and know-how
Each party to the business often brings specialized expertise and knowledge, which helps the joint venture become more competent and strong enough to move aggressively in a specified direction.
4. New market penetration
A joint venture may enable companies to enter a new market very quickly as all relevant regulations and logistics are taken care of by the local player. A common joint venture arrangement is one between a company headquartered in country “A” and a company headquartered in country “B” that wants to obtain access to the marketplace in country “A”. With the formation of the joint venture, the companies are able to expand their product portfolio and market size.
5. New revenue streams
Small businesses often face dealing with limited resources and capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can expand more quickly. The larger company’s extensive distribution channels may also provide the smaller firm with larger and/or more diversified revenue streams.
6. Intellectual property gains
Advanced technology is often difficult for businesses to create in-house. Therefore, companies often enter into joint ventures with technology-rich firms to gain access to such assets without having to spend the time and money to develop the assets for themselves in-house. A large firm with good access to financing may contribute their working capital strength to a joint venture with a firm that has only limited financing capabilities but that can provide key technology for the development and sales of products or services.
7. Synergy benefits
Joint ventures can offer the same type of synergy benefits that companies often look for in mergers and acquisitions – either financial synergy which lowers the cost of capital, or operational synergy where two firms working together increases operational efficiency.
8. Enhanced credibility
It typically takes some significant period of time for a young business to build market credibility and a strong customer base. For such companies, forming a joint venture with a larger, well-known brand can help them achieve enhanced marketplace visibility and credibility more quickly.
9. Barriers to competition
One of the reasons for forming a joint venture is also to avoid competition and pricing pressure. Through collaboration with other companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace.
10. Improved economies of scale
A bigger company always enjoys the economies of scale, which again is enjoyed by all the parties in the JV. This refers back to the notion of operational synergy.
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