Advantages & Disadvantage Of A Joint Venture Michael Ruge


Marketing refers to the promotional process of a certain product. In a marketing joint venture structure, two marketing companies come together to promote the product equally. With a joint venture, you’ll get out of it as much as you put into it. Although there are cases where some partners may not participate as agreed within the partnership, a joint venture is created because there are multiple parties seeking mutual success.

Different beliefs, tastes, cultural values, and preferences may become bottlenecks in the entire business process. There can be many advantages of forming a joint venture, out of which, profit generation is most often talked about. The following are the key advantages of joint ventures after combining resources and knowledge of two different business entities. Although forming a joint venture is a viable business strategy for some companies focused on a common objective, it has its caveats. Companies considering entering into a joint venture should compare the advantages of cost savings through pooling resources to the disadvantages innate to this type of business arrangement.

advantage and disadvantage of joint venture

This type of joint venture does not equally benefit both parties. This is because it occurs between the suppliers and the buyers. Since it is not a very profitable venture, it is sometimes referred to as “bilateral trading”. The inequality inherently occurs due to the powerful corporation who can terminate contracts as per their needs while the buyer is at the mercy of the collaborator. You can capitalize on this opportunity to create more opportunities in the future.

What is a joint Venture?

This is something that you should plan for and be prepared to handle. One of the biggest things you can do is communicate excessively with your joint venture partner. I have seen a lot of relationships fail due to a lack of communication. Another important feature of the joint venture is the sharing of profit and losses incurred. The risks involved become more when you want to enter a new market. Small businesses often face having limited resources and access to capital for growth projects.

But most of the times, the whole burden come on the shoulders of one party whereas another party is involved indirectly. It gives you a great opportunity to establish new business relationships and create a business network. A qualified joint venture is a partnership run by spouses, each of whom manages the business.

advantage and disadvantage of joint venture

But you need to consider that sometimes, certain risks and limitations play a key role in the route of success. Project completion and execution are a lot difficult when you have limited resources in terms of staff and capital. However, with a joint venture, your company can get better access to capital and staff requirements. All the required equipment and budget can be used for the timely delivery of a project. Experts recommend thoroughly planning exit strategies before entering into a strategic joint venture agreement. A joint venture doesn’t always go as expected and deadlocks might arise at any point.

What is an Interview: Definition, Objectives, Types & Guidelines

Profitability, sustainability, operational satisfaction, and financial satisfaction are the key attributes to measure the success rate of a JVs. When all these factors are taken care of by the parties involved, the success rate is positive. A joint venture is entirely based on the terms agreed upon by all the participating entities and can either be short term or long term. In 2012, Microsoft and American conglomerate General Electric took healthcare by storm with Caradigm, a strategic joint venture to simplify public health management.

Each participant share an equal right, access, and contribution in operating various functions that need attention. An international joint venture is one of the most successful approaches to set up a business in foreign countries. One of the most common exit strategies for a joint venture is to sell the stake your control in it. About 4 out of every 5 exit strategies involves a sale from one partner to the other.

International Joint Ventures Decrease Risk of Discrimination

Overall, a joint venture is a means for sharing advanced technologies and machinery for the benefit of both partners. It distributes production costs between the partners, making it cheaper for each to produce products. If the joint venture agreement extends to the distribution of the produced goods, shipping costs are also split, so it can open previously closed markets to small businesses.

If the objectives of the joint venture are not clear or not even specified, there may be unevenness in terms of who does what, in terms of profits, and in terms of losses should losses occur. The costs are either reduced or shared with your joint venture partner. Access to improved resources like experienced technicians, experienced staff, greater capacity and financial resources etc. are possible through joint venture business. When two companies involved in a joint venture without serious consideration and paperwork. They end up having a lot of disputes and conflicts which results affect the businesses of both the companies, and as a result, the joint venture becomes a failure.

The risks can be greater if one party turns out to be unreliable. It can also prove to be an opportunity to produce goods at a lower cost and take advantage of new technologies that are shared. No partner shall have to solely face the losses or issues like market uncertainty alone.

Imbalance in the share of capital, expertise, investment etc., may cause friction in between the partners. Joint venture companies can offer their existing product to sell through the partner’s network and share the profit. By exchanging products and services of the partner, they advantage and disadvantage of joint venture can diversify the product basket and sell it to their existing customers and increase the profit. Along with the shared profit and loss, you also share control over the business. You mutually control all-important business endeavors, operations, and other administrative tasks.

Advantages and Disadvantages of a Joint Venture

If formed correctly, the joint venture agreement can avoid costly litigation due to a violation of affiliation rules under SBA regulations. You may also want to study up on what similar businesses are doing. These businesses are the ones that operate in similar markets as yours. Seeing how they use joint ventures could help you decide on the best approach for your business. A joint venture is a strategic agreement between two or more individuals or entities to engage in a specific project or undertaking.

The relationships can lead to lucrative ventures when going after federal government contracts. However, disaster can occur when the government or a competitor decides to challenge the relationship. Allows companies to enter related businesses or new geographic markets or gain new technological knowledge. Here, by flexibility, I mean to say is that each participant has the freedom to continue with the individual business.

For tax purposes, the IRS allows each spouse to file a Schedule C for their share of the business income and losses in the same way that sole proprietors do. In contrast, in a joint venture, both parties collaborate to achieve a common goal and share equal liability if something goes wrong with the project. For example, a company may manufacture a product and incorporate the joint venture agreement into it for promotional purposes. Both companies are involved in the same product, but their functions are different. These two companies can form a joint venture to generate synergies for the greater good. These businesses can take advantage of economies of scale to provide a cost advantage.

When a startup or a small-scale business comes together with a well-known organization, it gets the exposure it needs to establish its own identity and compete with bigger players in the market. The top advantage of joint venture is the combined expertise it brings to the table. When two or more organizations join hands, they bring together complementary skill sets and abilities. This greatly increases their chance of success when exploring a new product or field. That’s why it is imperative for the arrangement to spell out how profits or losses get taxed.

The communication between partners is not great as they belong to different societal classes. Corporations, Partnerships, and Limited Liability Companies and also other business entities can survive as a JV. Tenancy in Common is a method of ownership where two or more parties, referred to as tenants in common, share interests in real estate or land. A co-owner is an individual or group that shares ownership of an asset with another individual or group.

Although it helps in expanding the company in the market it also requires experience and co-operation. The credential is very important in the early stage of the business. However, if you have the perfect plans for production and other resources, the joint venture can be useful. By now, flexibility is the new favorite word in the corporate sector. Before starting any enterprise in a combined manner, it is important to have background knowledge of the other participant. In an insider joint venture, the participants have an equal right to view confidential matters.

There are many benefits to this type of partnership, but it is not without risks – arrangements of this sort can be highly complex. 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. The contract arrangement that creates a joint venture isn’t a separate entity that the IRS recognizes.

There may be a breach of contract, organizations may want to move out of the venture or abandon it. It’s best to plan for and clearly define the terms for all possible end scenarios to avoid conflict and, in worst cases, legal intervention. A joint venture brings in people from two or more different organizational cultures to work together. While this can introduce new, innovative solutions and workflow methods, it also has a downside. Because the people involved are accustomed to their own techniques and processes, arguments can arise about choosing one organization’s methods over the other’s.

Breaking into a new market or region brings its own set of challenges and risks. These include budget and time overruns or unsatisfactory performance of the completed project. In a strategic joint venture, capital investment and the required resources are shared among all participating entities. This reduces the risk of the project incurring heavy losses and adversely affecting any one particular entity.