The Advantages and Disadvantages of a Joint Venture
A joint venture is when two or more parties, called co-venturers, enter into a limited-time agreement to complete a specific business venture. All involved parties share in the profits and losses while simultaneously pooling their resources to complete the specific objective. Let’s examine the key features of joint ventures and why you might want to consider one.
The key features of a joint venture are:
- Limited Timeframe: When the venture is agreed upon, all parties also agree to when the venture will come to an end. This makes it a temporary partnership that might enable you to undertake a large project or endeavor that you cannot complete on your own. It will also allow you to enter into a partnership without having to commit to anything long-term.
- Profit and Loss Sharing: When you become a co-venturer, your agreement will have clearly defined profit and loss ratios included, so you will know from the beginning what type of revenue you can expect. This mitigates the risk you take by ensuring that you and your co-venturer(s) are held equally accountable in success and failure.
Additionally, co-venturers are allowed to undertake other business initiatives while in a joint venture, so there is no need to put the rest of your business life on hold.
Advantages of a Joint Venture
Now that you understand the different aspects of a joint venture, let’s examine the advantages. They include:
Access to more resources
- You are essentially pooling your resources with another, giving you the ability to tap into a larger amount of capital and additional resources.
Access to new technology
- Your co-venturer may have access to or be more familiar with the latest technology in your industry. By partnering with them, you are now able to take advantage of this new technology without having to make the investment yourself.
Access to new markets
- If you choose a partner in a different national or international market (or who targets a different demographic than you, such as female consumers or 18- to 24-year-olds), this can open up brand new revenue streams and customers to you that you wouldn’t have had easy access to before. Also, by partnering with an established business member of this new market, you can call upon their local or demographic-specific knowledge.
Access to vendors and supply chains
- Your co-venturer may have partnerships or agreements already in place with third-party vendors that you may now be privy to; this is especially important if you anticipate doing business in the market once your joint venture ends. You will have the ability to work with new vendors and vet them before entering into your own agreement.
Disadvantages of a Joint Venture
- It’s possible that your partner will have a very different idea of what will be accomplished through your joint venture. It is important to clearly state all possible outcomes and goals up-front so that both parties may leave the partnership satisfied. Also, you want to be sure that you and your co-venturer are not working at cross-purposes.
- While it’s true that entering a joint venture may give you access to new technology and assets, it can also create an odd balance of power within the partnership if you or your partner has vastly different assets at the start. This imbalance can easily cause resentment and friction throughout the course of your partnership.
- Working with someone in a different country can be extremely profitable, but many different cultures around the globe conduct business very differently. Make sure you understand the intricacies of doing business out of the country to avoid any unintentional insults.
- It is possible you will need to make a sacrifice of profits in order to partner with the type of business you’re interested in. Be sure to weigh the pros and cons of a joint venture before making your final agreements. In some cases, what you’ll have to forfeit for the partnership will outweigh what you gain in return.
When deciding if a joint venture is the right step for you and your business, take the time to really investigate potential partners. Consult with an attorney when drafting the Joint Venture Agreement to ensure that all the terms are equitable. It’s important to ensure you’re doing all you can to get the most out of this potentially lucrative partnership.