A Joint Venture is an alliance where two or more business parties form a partnership to share their intellectual property, markets, knowledge, assets and profit. It is different from amalgamation and merger because there is no transfer of ownership in a Joint Venture. Some large companies decide to form a joint venture with a smaller business.
A Joint Venture (JV) is defined as a business entity created by two or more parties, characterized by shared ownership, shared governance and shared returns and risks. Companies typically follow the system of the joint venture for several reasons to access a new market, to gain scale efficiencies by combining assets and operations; emerging markets; to share the risk for significant investments or projects; or to access skills and capabilities of the companies.
When two or more persons, along with individuals come together to form a partnership temporarily for carrying out a particular project, such collaboration is known as a joint venture. The parties of the JV are known as "Co-venturers". A significant advantage of a JV is that it helps to grow the business faster, increase its productivity and generate an ample amount of profit.
Advantages of a Joint Venture:
- introduction to new markets and distribution networks
- increased capacity
- sharing of risks and costs (i.e. liability) with a partner who has access to more significant resources, including specialized staff, technology, and finance
- flexibility in the business.
For example, a Joint Venture has a limited lifespan and can only cover a part of the whole business of the parties. Thus it limits the commitment and the business exposure for both parties. The advantages of the joint venture may exceed the disadvantages; however; one should keep in mind that faith and risk play a vital role in the success of the business.
Disadvantages of a Joint Venture:
Restricted Flexibility: Flexibility is essential in some projects whereas sometimes it requires full concentration, and thus the concurrent work may become difficult. Such participant focuses more on the JV product, and the individual businesses suffer a lot.
Claims and Assets: It is essential to mention the assets and involvement of the participants in the joint venture agreement to prevent allegations of the other parties so that no issue and legal trouble arises in future.
Equal involvement of all parties is severe: The share of the profit is ideal, but it is impossible to maintain a contribution. For instance, if Company A is planning the process of production, Company B is given the duty of production and Company C is responsible for planning and implementing market strategies. Company A will not be active in the process of production and promotion, resulting in pressure on Company B and C; this can affect the individual business of the parties.
Dissolution of the Joint venture:
- The JV is not a permanent structure. It can get dissolved when:
- Aims of JV are met
- Objectives of the JV not achieved
- If both or either of the parties develop new goals
- If both or either of the parties no longer agree with JV goals.
- If the time agreed for JV business has expired
- If legal or financial issues arise.
- If the market conditions evolved and changed then the JV is no longer appropriate or relevant
- If one party acquires the business of other
Types of the Joint Venture
To set up a JV depends on what the business is trying to achieve. Most common types of JV are:
Limited Co-operation: If one company agrees to collaborate with the other business in a limited way, it can be said as the limited co-operation in the business. For example, a small business entrepreneur wants to sell his new exciting product through the network of distribution of the larger company. The two partners agree a contract setting out the terms and conditions of how this would work under the limited co-operation.
The Separate Business: If an individual set up a joint venture business separately, to handle a specific contract. To start a joint venture company is very flexible. The partners own shares individually in the company and agree on how they should manage them.
Business Partnerships: Sometimes, a limited company may not be the right choice. Instead, one can form a business partnership or a limited liability partnership. One can even merge the two businesses to form a joint venture.