Joint Venture Features, Advantages and Disadvantages
Joint ventures are business arrangements where two or more parties reach an agreement to join their resources for the purpose of accomplishing a specific task.3 min read
What are joint venture features advantages and disadvantages? Joint ventures are business arrangements where two or more parties reach an agreement to combine their resources for the purpose of accomplishing a specific task. Each party remains independent of the other. Each party works on its own and takes responsibility for building and maintaining its own brand and image. 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.
The ideal situation would be having a partnership with an equal split of profits and losses. In the corporate world, however, the partnership layout is an important consideration. The options are for each partner to contribute an equal amount of funds or assets or to adjust the profit-and-loss ratio according to the percentage of each partner's investment in the company.
The Advantage of Dividing Risks
One of the more popular advantages of forming a joint venture is that it lets the parties split the risk between their companies.
- The risk of developing and creating a new product can be a hindrance for many companies, and a lot of businesses can't take on that kind of risk alone.
- With a joint venture, each involved company offers up part of the resources that are required for the development of a new product or service, and each helps to expose it to the market. This eases the burden of financial challenges, researching the market, and developing the product.
- By sharing the burden, the chance of a project failing and having a negative impact on a company's financial health is reduced because the cost of the project is shared by each of the joint venture's involved parties.
The Disadvantage of Potential Operational Failure
The presence of two joint ventures per project increases the number of ways operational issues may cause failures and could even lead to mismanagement of resources on the part of one or both parties. Therefore, the investment risk for each party is greater. To protect yourself from potential mismanagement in a joint venture, it's best to bring on a professional consultant or attorney to help in the development of the procedures that will govern the joint venture relationship.
The Advantage of Lower Initial Investment
The low initial investment and reduced cost of getting started is the thing that most companies find appealing about entering a joint venture.
- This model reduces the upfront amount of investment and reduces overall costs.
- This helps each company create a competitive advantage and greater brand recognition among customers because the companies can promote one another.
- All partners contribute to the cost of creating the new product or service, so that brings the amount of the initial investment below the amount required to start other types of operations.
- A joint venture is a viable option for a company looking for investment opportunities with lower initial costs.
The Disadvantage of Unreliable Partners
One problem that can arise in joint ventures is if a partner turns out to be reliable. When this happens, all parties involved can end up in a worse position.
- To protect yourself from potential problems, assess the equity that you and the potential partner are each bringing to the deal, create a solution that suits your company's profile, and make sure it satisfies your customers' needs.
- By engaging in practices that are safe, you can eliminate potential pitfalls from the investment process.
- Even with the potential challenges, a joint venture has a number of advantages for companies that understand the competitiveness of the market.
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. This lets the products go to market at a reduced price. 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.
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