In a non-technical language, a joint venture (JV) is a form of business partnership in which two business entities undertake a contract to share the profit and losses together. The contract is renewed after a certain time period or until certain objectives are met as agreed by both parties. A JV has its set of pros and cons depending on the people, interests, goals, and nature of the business.
On one hand, it empowers two businesses to achieve more success as a result of shared resources of the two companies, while it also increases chances of failure that may come as a result of the conflict of interests of the business owners. Being a budding entrepreneur, it is important to learn the various pros and cons of running a joint venture and if it worth your business. Here they are:
Pros:
1. It Widens Professional Competencies of Your Employees
For companies, JV offers a wider room for business development and growth. When two parties join hands in a business deal under a joint venture contract, they are able to exchange skills with each other that enrich workers on both sides of the organizations. Both the companies are able to bring on the table a variety of skills which benefit their respective business. In the long run, they are able to expand the professional competencies of their workers so that they can become more effective in handling various types of projects.
2. You Can Venture Into New Markets
JV let companies explore new consumer markets and learn the different creative, technical and technological insights that come with varying geographical locations. In this way, you are able to expand your products and services to new people and penetrate further into new business avenues. In addition, you can hire the workforce to cater to the needs of new markets. In other words, you are able to acquire new clients and tap into the potential of talent around the world.
3. It Saves You From Extra Costs
Naturally, when two or more companies form a partnership, it results in sharing of technological, transportation, operational, and administrative infrastructure. Such a business model is particularly beneficial for startups that run on a limited budget. Since the two companies share a workforce and logistics, they are able to divide the cost of hiring extra workers and machinery for additional projects which save them a substantial amount of money from their budget.
4. It Increases Your Risk Tolerance
The best part about JV is that even if the project were to fail or does not materialize in the way you had expected it, the losses are shared mutually between the two parties. In other words, it saves you from bearing the financial repercussions of a major business setback as both the companies equally share the burden of the slump in their business.
5. It Relieves You From Negative Effects of Divestment
We see companies practicing divestitures in this day and age. However, JV provides the easy way out for both companies to exit from a non-core business activity without facing the music of any financial and legal repercussions.
Cons
1. Miscommunication Leads To Mistrust
Since JVs are formed for relatively shorter periods of time than a long-term business partnership, the objectives are often not communicated to the business partners. This lack of trust creates a communication gap between the two entities which often poses chances of conflicts among the partners.
2. It Poses Occupational Imbalance
When two companies form a business synergy, it disturbs the team composition on both sides of the business. This leads to an imbalance in occupational, financial, and intellectual investments of both the organizations leaving the two companies with work-related discrepancies.
3. The Differences In Management Styles Create Friction
Management styles and company cultures impact heavily when JVs are constructed. It is because they shape the mindset and attitudes of the people working in both the organizations. Sometimes, one management finds itself a misfit for the other organization which increases chances of a split among the business partners.
4. It Creates Possibilities of Conflict of Interests
The majority of joint ventures come as a result of outsourcing services. Unlike a conventional startup, this form of business partnership is formed without any familiarity between the two partners. Such a union is prone to conflicts as both the parties are oblivious of the goals, interests, and scope of each other’s businesses which in turn increase chances of conflicts of interests.
5. Lack of In-Depth Research & Analysis Leads To Failure
Thorough study and examination are a prerequisite for setting up the objective(s) for a possible JV. Without the lack of it, you can never really achieve any solid results. From the above rundown, you can decide whether or not a joint venture is in alignment with your sales strategy and overall business objectives. Therefore, you need to be mindful of the steps leading to a JV and this is the purpose that this article seeks to serve the readers. Hope it helps you make a better decision for your business. Wishing you all the luck!
Author Liana Daren is a Financial Expert and is associated with a leading treasury firm. She is also an academic writer and students can get in touch with her for help with coursework.
I hope you enjoyed this post about the pros and cons of forming a joint venture or partnership in your entrepreneurial journey.
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