Many business environments are full of risks and competition that they can hardly take on their own. Businesses that wish to stay ahead are using tools that can aid in mitigating the risks while increasing the margins. Joint ventures allow such firms to join and bid to complete bigger jobs which one firm could not handle due to the risk profile or lack of experience. Joint venturing allows small companies to compete with larger corporations by increasing their pool of resources
For joint ventures to be successful, both parties must realize that trust and communication are the key issues. Playing bully in the negotiation process could have negative results later in the process. Positive synergy cannot be drawn if one of the firms feels that they are receiving lesser benefits from the venture. The following section presents a few aspects regarding joint ventures that every businessperson should understand.
What Are Joint Ventures?
In its most straightforward definition, a joint venture involves two parties coming together for a project aimed at accumulating profits. As with any relationship, the enterprise needs:
- Strategic compatibility;
- Interaction between colleagues to be effectual.
A firm will also need to consider the accounting impact of a venture on its financial statements. It is vital that the finance team is involved in the negotiation process to ensure that the venture doesn’t have any unintended negative consequences. Depending on the parties’ ability to influence the abilities of a joint venture, a party can have different options for reporting investments on its financial statements.
Who Uses Joint Ventures?
- What will my company provide?
- What is my side not allowed to do?
- Who is liable for damages?
- How long will the venture take?
- What is the time frame of the project?
- What happens if one party wants out early?
- What are the benefits?
- Who owns what is created from the venture?
These are just some of the questions many businesses ask before they make their decision to form a joint venture. However, as noted, any legal company is eligible for a joint venture.
Any business that requires more technical expertise, increased resources, and better access to distribution channels can become a part of a joint venture. Getting involved in a joint venture is a major decision and requires businesses to understand the risks and benefits they can gather from the relationship. In addition to their own needs, businesses need to consider what the other parties are hoping to get from the relationship.
If you are in business, especially the construction industry, and are required to handle projects that are larger than usual, a joint venture is your profitable way out. A joint venture will allow you to expand outside the realm of what your company has engaged in the past. In fact, most joint ventures come into existence out of convenience.
Investing in a joint venture is an effective method to take on larger, riskier, and more profitable jobs. A joint venture is arranged as an entity on its own and can essentially bid on a given project in this state and function indefinitely if possible.
5 Key Advantages of Investing in Joint Ventures
1. Increases Access to Resources as Companies Seek to Achieve a Common Goal
For example, two companies can come together to own an intellectual property for a new product or technology. None of the parties can pursue the rights on their own.
The two parties can share responsibilities with one party funding the project while the other supplies the equipment, labor, property rights and the other assets required for the project.
2. Business Parties Can Share Expertise and Management
They can also share their experience, technology capabilities, and industry knowledge necessary to run their business. In an instance, one party may have the required knowledge to develop a certain product and may be looking for funding from the other.
One of the joint venture parties could alternatively have the piece of information necessary to develop a product while the other company may not.
3. Allows Parties to Share Costs That None of Them Could Afford on Its Own
Labor and management, research and development, supply and distribution as a percentage of the total costs of a project could distribute among parties.
Per cost units for every party in a joint venture can reduce as a result of better economies of scale and the efficiency due to better productions levels.
4. Allows Participants to Share Risks in a New Market or to Create a Product/Service
Independently, neither of the parties would have had the risk appetite to commit resources to such a task. This is more, so if it is an investment that may not have yield enough to satisfy the development costs.
Sharing the risks and resources can ease the burden of a business risk.
5. Enables Participants to Have Access to High Growth Markets That They Would Otherwise Not Access Independently
A joint venture allows better access to customers and suppliers for the parties involved. For instance, one joint venture party may have the necessary equipment, funding, access to customers and distribution channels but may lack the intellectual rights. The other company, on the other hand, may fail to have the supply of assets and equipment but has the intellectual rights.
Such parties while together in a joint venture possess an increased bargaining power in contract negotiations and in the acquirement of goods and services that would have been difficult to acquire independently.
In conclusion, as a party in a joint venture, your company will have the resources, manpower, and skills necessary to conduct business outside your jurisdiction. This is since your partners will cover your lack in particular areas.
This is the perfect strategy for entrepreneurs. However, a joint venture requires a thorough analysis, weighing the pros against the cons, and a complete understanding of the party you are being engaged with to be successful.
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