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Joint ventures: The advantages and disadvantages

Thinking of starting a joint venture business? Joining forces with someone when starting a business should be carefully considered. Here are the advantages and disadvantages of a joint venture.

Joint ventures can be a great business decision. In this post, we outline the advantages and disadvantages of joint ventures.

We’ve broken this down to help you decide if it’s the right strategy for you and your potential ‘partner’.

The meaning of ‘joint ventures’ in business

A joint venture is a business entity set up by two or more parties. A joint venture aims to cooperate on a specific project, to achieve a common goal.

It usually involves shared ownership, shared risks and rewards, and shared governance.

The joint venture will normally end when the goal is achieved. So the time period can vary, but five to seven years is fairly typical.

A joint venture business is a great way to break into new markets and get access to new skills. And it means businesses don’t have to outsource work.

Also, it can help to scale efficiencies because businesses can combine assets and resources.

This means there’s a shared risk for major projects and investments.

grow your business like this construction firm

The difference between a joint venture and a partnership

The best way to explain the difference between a joint venture and a trade partnership? Think of a joint venture as a trade agreement between two countries.

Under a joint venture agreement, the two countries remain their own separate countries. But they work together for a specific purpose.

The two countries remain legally separate from each other. And they continue as separate countries once the joint venture ceases to exist.

Whereas in a partnership, the two countries would merge to become one country. This new country would be a separate legal entity, operating in its own right.

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Examples of a joint venture

One of the best-known joint venture examples is Sony Ericsson.

Japanese company, Sony, and Swedish firm, Ericsson, started a joint venture in 2001 to manufacture phones and other electronics. In 2011, Sony bought its partner out.

Another example is Ford and Toyota; they formed a joint venture in 2011.

They used Toyota’s hybrid expertise and Ford’s popularity in the American truck market to develop hybrid trucks.

Advantages of a joint business venture

Joint venture advantages and disadvantages

A joint venture should always involve careful thought and consideration.

Of course, joint ventures are attractive because they pool resources to maximise profits. And this is with minimal or no investment.

However, you should never jump into this business decision. You’ll need to learn about the joint venture advantages and disadvantages first.

So, let’s look at some of the advantages of joint ventures, as well as the disadvantages. This will help you decide whether it’s the right decision for your business.

Advantages of a joint venture

These are some of the advantages of a joint venture:

Shared resources

The ability to share resources with little to no capital expense is a great advantage of joint ventures.

The shared knowledge, expertise, and resources help the companies expand into new markets. So growth can be achieved in a relatively low-risk way.

Access to new markets

A joint venture is ideal for businesses that want to broaden the geographic market. This is because joint ventures are businesses that increase brand awareness to new audiences.

Flexibility

While the companies work together on the joint venture, they can both continue their sole trader or limited company activities unrelated to the joint venture.

There’s also a timeframe on the agreement, so the companies aren’t bound to each other when the joint venture agreement ceases.

 

Shaking hands on a joint venture agreements

Disadvantages of a joint venture

It’s no secret that businesses carry an element of risk, and a joint venture is no different.

These are the disadvantages of a joint venture for you to consider:

Accountability

If something goes wrong, both companies are liable, which includes any legal claims that arise.

Restrictions

There are some restrictions with joint ventures. For example, your joint venture agreement might include non-competition or non-disclosure clauses.

If it does, this could limit your company’s ability to interact with other organisations.

Equality

A joint venture is not always a 50/50 split. Resources could be contributed unevenly.

But sometimes this can lead to problems if profit sharing doesn’t adequately compensate one side or the other.

If the objectives aren’t clear, the communication between the two companies is poor, and the workload isn’t considered equal, conflict can arise.

Tradesmen shaking hands over construction plant

Types of joint venture

In the UK, joint ventures can either be an unincorporated joint venture or an incorporated joint venture.

Unincorporated joint ventures are businesses that form a partnership, a co-operation agreement, or a strategic alliance.

An incorporated joint venture is a company or a limited liability partnership (LLP) that is a separate business entity with its own legal personality.

The three main types of joint venture

1. Limited co-operation

Limited co-operation is when you agree to collaborate with another business in a limited and specific way.

For example, a smaller business may use the distribution network of a larger business to sell a new product. A contract would be in place between the two companies to outline the conditions of the arrangement.

2. Separate joint venture business

A separate joint venture business is often a new company that’s set up to take on a particular contract. The partners own shares and agree on how the company will be managed.

3. Business partnerships

Another option is to set up a business partnership or a limited liability partnership.

Joint ventures have their advantages and disadvantages. If you’re considering a joint venture agreement, we recommend you consider your options carefully, take time to plan properly and seek legal advice. A legal representative can use a joint venture agreement template to make sure your interests are fully protected.

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Joint ventures FAQs

What are the risks of a joint venture?

One of the key risks of a joint venture is finding a person or company you can trust to collaborate with.

Both companies are liable if something goes wrong. And a joint venture could limit your opportunities to work with other organisations.

This just depends on the clauses in your joint venture agreement.

Why would you want a joint venture?

Businesses might want a joint venture to break into new markets. This can be done in a relatively low-risk way, with little to no capital investment.

Are joint ventures successful?

A joint venture can be successful. So, when entering into this type of agreement, choose a partner who shares your company’s values.

And make sure you get a detailed joint venture agreement in place.

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