A joint venture is a business arrangement where two or more parties agree to pool their resources together for the purpose of accomplishing a specific task. This work could be a new project, research and development investments, or any other business activity that is jointly relevant to everyone or each organization involved in the agreement.
Each of the participants in a joint venture is responsible for the profits, losses, and costs associated with mutual activities. This business effort is also an entity by itself, separate from the other business interests of its founders.
Although a joint venture is a partnership in every sense of the word, this business effort can choose to take on any legal structure. Limited liability companies, corporations, and partnerships can all work together to form this agreed-upon structure. It could even combine companies of various sizes to take on one significant project or several smaller ones.
Several joint venture advantages and disadvantages are worth considering when looking at the future of this business structure.
List of the Advantages of Joint Ventures
1. Joint ventures are not permanent arrangements to manage.
Joint ventures are not typically a permanent solution. It is a temporary arrangement that allows two or more companies or individuals to help each other in specific situations. That means you are not taking long-term risks when creating this arrangement. If something goes wrong unexpectedly, then most agreements allow for an exit plan that can limit the financial obligations of each party.
2. Companies receive access to better resources.
When agencies come together to form a joint venture, then it gives everyone involved access to better resources. Each company can take advantage of the specialized technologies and staff that are available in each organization. Instead of needing to hire or develop these opportunities internally, all of the necessary capital and equipment becomes part of this overall agreement.
This makes it a lot easier to enter foreign markets because an organization can partner with an existing company instead of trying to create new operations. It is an easy way to expand distribution networks or obtain access to intellectual property without a significant investment.
3. New resources provide a way to gain new expertise or insights.
When agencies come together to start a joint venture, then it gives each one an opportunity to gain new insights and expertise into specific areas of their industry. That makes this arrangement ideal when one company has access to a market, and another has more resources in research and development. That makes the targeted demographics easier to understand, while there are no long-term obligations that could become financial anchors in the future.
Even if the joint venture ends in failure, it’s existence as a separate entity doesn’t impact the structures, revenues, or liabilities of the home organizations. The cost of the effort ends up being the primary risk factor involved in the solution.
4. No one takes on all of the risks independently with a joint venture.
When organizations come together to form a joint venture, then it gives them a way to spread out the risk factors that are involved in their planned activities. This advantage also makes it possible for the overall cost of the work to be less individually since there are multiple parties actively engaged in the agreement. Although that means any profits or credit get shared equally, this conservative approach makes it a lot easier to experiment with new ideas because no one must take independent risks to generate possible solutions.
5. It is a flexible arrangement that can go through modification if necessary.
The agreement that forms a joint venture can provide flexibility in the arrangement for all of the parties involved. Not only can it be a limited lifespan that covers a fraction of what each organization provides to the partnership, but it can also have terms that can change when specific goals or outcomes get reached.
That means a joint venture can always take a balanced approach so that everyone can benefit from the arrangement. It doesn’t require one company to find success through the failure of another.
6. You can always find ways to exit out of a joint venture.
Even if you don’t have a formal exit plan written into a joint venture agreement, the timeline of this arrangement makes it possible to leave if it becomes necessary. The processes of divestiture and consolidation give a company several creative ways to escape their non-core organizational mission and vision without taking on too much risk as a result. The brand message can stay the same, including when unforeseen circumstances might cause the partnership to split.
7. Every asset in a joint venture gets inventoried at the start of the process.
You won’t need to worry about losing intellectual property or other commercial assets when you enter into a joint venture agreement. Every asset of each party gets inventoried as part of the initial stages of this arrangement. That means you will always know the assets that are yours, at the beginning of the process, even when the rewards you earned exceed your expectations.
This advantage is especially important for the agencies that form a limited liability company with their joint venture. Because pass-through income is part of that structure, the taxation issues can become quite complex unless complete ownership stakes, responsibility, and inventory are entirely outlined.
8. Companies can sell their shares of a joint venture.
There are a couple of ways in which this advantage of a joint venture becomes possible. The most common method of taking money out of this arrangement is to sell one’s stake in it. If the other partner agrees that there is value in owning another portion of a new company or all of it, then a fair offer will usually get an organization out when they no longer want to participate.
The other way to sell shares is to take a joint venture and turn it into a public company. Holding an IPO will allow for the issuance of preferred and common stock that can translate into additional values when a successful outcome is achievable.
List of the Disadvantages of Joint Ventures
1. A joint venture isn’t recognized by the IRS.
The contract arrangement that creates a joint venture isn’t a separate entity that the IRS recognizes. When the decision gets made to form one, the most common thing to do is to set up a new entity, and then each party to the arrangement helps to determine how taxes will get paid in the future. Unless the new joint venture is a separate entity and pays taxes independently, each party is responsible for whatever amount gets put into the agreement.
That’s why it is imperative for the arrangement to spell out how profits or losses get taxed. If the agreement is only a contractual relationship between everyone, then it is up to the documentation to determine the outcome of this potential disadvantage.
2. Joint ventures can create a clash of cultures.
Different companies have their own unique managerial styles that they implement. When these two cultures are at odds with each other, then it can result in poor integration of the joint venture arrangement. A lack of cooperation due to this disadvantage can cause an agreement to unravel before any benefits become achievable. Even if there are proactive efforts to manage this problem, leadership groups that have different preferences, tastes, or beliefs can find that these issues can get in the way if they are left unchecked.
3. It can result in an imbalance of assets for one or more parties.
Because a joint venture involves multiple companies working together on a single project, it can cause an imbalance to occur if one agency has more expertise, investment, or assets then the other parties involved. It has an adverse impact on the relationship because the returns are not equal to the work put into the effort in the first place. That’s why the value of intangible assets, like the geographic location of an agency, must get documented in the initial paperwork that forms this new entity.
4. Joint ventures usually limit other outside activities.
When agencies come together to form a joint venture, then one of the stipulations that govern the arrangement involves future outside activities. It is quite common for these contracts to restrict any other outside efforts from the participant companies while this agreement remains active. That means a new business opportunity that comes up while working in a joint venture would need to be set aside or ignored, and that could be a costly decision to make.
Every company will want to make sure they fully understand what it is they are getting into before agreeing to a joint venture. It could be a decision that has a negative impact on the entire business.
5. Someone always feels like they’re providing an unequal amount of effort.
A joint venture provides unique resources from different perspectives to create something new. There are times when someone will always feel like they are providing an unequal amount of effort compared to the other parties in their arrangement. If the duties of each group are not entirely outlined correctly, then it can be possible for one agency to take advantage of everyone else by sitting on the sidelines. The pressure is always on the firms that have active responsibilities in the present time, without regard to what may be necessary in the future.
6. Companies can restrict or eliminate the flexibility found in joint ventures.
A joint venture can be a flexible option for agencies to consider, but there are also times when this benefit gets restricted. If that outcome occurs, then the participants in the agreement must focus on the work they hope to accomplish so that the contract becomes a profitable experience. If one party decides to give up without selling their stake in the work, then it can become a massive loss for everyone involved.
The three most common reasons why a joint venture fails our cultural differences, poor integration processes, and unclear leadership. Up to 70% of these efforts eventually fail, and the only way to avoid the problem is to do sufficient planning before the work even begins.
7. Leadership gaps can form in some joint ventures.
When two or more organizations come together to form a joint venture, then there must be some level of equality on their leadership teams. If one set of executives holds all of the experience that is needed for the new entity, then the imbalance that occurs can result in a lack of enforcement. Gaps form when no one is willing to take responsibility for expanded roles or move to a new position, even though more job opportunities become available through this process.
That means until the hiring managers can find some of the human capital needed to plug in the missing pieces, it may be a slow start for the joint venture.
8. There must be an emphasis on research and development.
Joint ventures are successful when each party does its required part in the agreement. If everyone decides that they will not be responsible for funding or implementing new research and development processes, then the new entity will likely get sold to one of the other partners. This disadvantage can also occur when one party tires of trying to integrate processes without results, deciding to abandon or sell their investments to recoup whatever losses might occur.
Although some businesses from joint ventures have gone on to do amazing things, the sale or abandonment of one partner usually results in the closure of an opportunity.
9. The expectations set for the joint venture could be unreasonable.
When companies come together to create something new, then the expectations for a positive result can be quite high. It is essential to take a realistic approach with a joint venture, understanding that immediate gratification from an investment is rather rare. Managing expectations is an ongoing issue, especially if you find yourself working in an unfamiliar industry.
If expectations are set too high for this effort, one party might decide to disengage from the process entirely to focus on the operations of the home business. Agreeing on a strategy to create future results will help to remove the natural barriers to communication and cooperation that exist.
Sony Ericsson is one of the most famous examples of a successful joint venture between two large companies. They came together in the early 2000s with the idea that together they could become a global leader in a growing cellular market. After several years of operating this entity together, the entire venture would eventually become solely owned by Sony.
Microsoft sold its stake in Caradigm in 2016, which was a joint venture create it with General Electric Company. The goal of the work was to integrate the software giant’s Amalga enterprise healthcare data and intelligence system into the technologies manufactured by GE.
When we examine the advantages and disadvantages of joint ventures, it is essential to remember that it is not a partnership or a consortium. These terms are reserved for single business entities that two or more people form. It can be a beneficial arrangement in a lot of ways, but there are always risks that must get managed throughout the process to ensure a positive result.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.