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Advantages & Disadvantage of a Joint Venture

Joint Ventures or JV’s are an increasingly popular way for people to expand their business and take advantage of new opportunities.

A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. It is different to a partnership because partnerships generally entail a continuing, long-term business relationship.

The joint venture structure is not a legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants and when the JV goals are complete the JV ceases to exist.

Advantages of a JV

  • access to new and / or complimentary expertise. staff, skillsets and technology
  • access to related businesses or new geographic markets or gain new technological knowledge
  • sharing of financial risk
  • Flexibility
  • offer the opportunity to move into new, non core areas
  • the new venture may be separated and sold off at a latter stage

Disadvantages of a JV

  • finding the right people to work with takes time and effort
  • JV’s can fail if
    • objectives are not clear to all parties
    • imbalance between what the parties bring to the JV eg in financial resources, expertise or time
    • incompatibility – whether cultural or personal
    • poor communication

As with any business expansion or re-structuring, it is important to be clear in your objectives and honest about what can be acheived.

Be realistic about your strengths and weaknesses – consider performing a SWOT analysis (strengths, weaknesses, opportunities and threats analysis) to identify whether the two businesses or individuals are compatible. Choose a partner who will compliment your skill set.

When you have chosen your prospective partner make sure you write things down. This way you have a clear record of expectations and obligations, this prevents misunderstandings and provide both parties with strong legal recourse in the event the other party fails to fulfil its obligations while under contract.

Remember to think about an exit strategy should the JV not meet expectations.

A written Joint Venture Agreement should cover:

  • The parties
  • The objectives
  • Financial and or other contributions
  • How will Intellectual property be handled
  • Day to day management of finances, responsibilities and processes to be followed.
  • Dispute resolution, how any disagreements between the parties will be resolved
  • Termination of the JV.

Consider using confidentiality or non-disclosure agreements between the parties when starting discussion about the JV, this helps to protect sensitive commercial secrets or confidential information.