A commercial enterprise between two or more businesses for tactical and strategic purposes Show
What is a Joint Venture (JV)?A joint venture (JV) is a commercial enterprise in which two or more organizations combine their resources to gain a tactical and strategic edge in the market. Companies often enter into a joint venture to pursue specific projects. The JV may be a new project with similar products or services, or it may involve creating an entirely new firm with different core business activities. Companies initiate a JV through a contractual agreement between all concerned parties. The profit and loss from the venture are shared by the participants. Top 10 Advantages of Joint VenturesA joint venture offers several advantages to its participants. It can help a business grow faster, increase productivity, and generate additional profits. 1. Shared investmentEach party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company. 2. Shared expensesEach party shares a common pool of resources, which can bring down costs on an overall basis. 3. Technical expertise and know-howEach party to the business often brings specialized expertise and knowledge, which helps make the joint venture strong enough to move aggressively in a specified direction. 4. New market penetrationA joint venture may enable companies to enter a new market very quickly, as all relevant regulations and logistics are taken care of by the local player. A common joint venture arrangement is one between a company headquartered in country “A” and a company headquartered in country “B” that wants to obtain access to the marketplace in country “A.” With the formation of the joint venture, the companies are able to expand their product portfolio and market size, and the country B company obtains easy access to the marketplace in country A. 5. New revenue streamsSmall businesses often face having limited resources and access to capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can expand more quickly. The larger company’s extensive distribution channels may also provide the smaller firm with larger and/or more diversified revenue streams. 6. Intellectual property gainsAdvanced technology is often difficult for businesses to create in-house. Therefore, companies often enter into joint ventures with technology-rich firms to gain access to such assets without having to spend the time and money to develop the assets for themselves in-house. A large firm with good access to financing may contribute their working capital strength to a joint venture with a firm that has only limited financing capabilities, but that can provide key technology for the development of products or services. 7. Synergy benefitsJoint ventures can offer the same type of synergy benefits that companies often look for in mergers and acquisitions – either financial synergy, which lowers the cost of capital, or operational synergy, where two firms working together increases operational efficiency. 8. Enhanced credibilityIt typically takes a significant period of time for a young business to build market credibility and a strong customer base. For such companies, forming a joint venture with a larger, well-known brand can help them achieve enhanced marketplace visibility and credibility more quickly. 9. Barriers to competitionOne of the reasons for forming a joint venture is also to avoid competition and pricing pressure. Through collaboration with other companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace. 10. Improved economies of scaleA bigger company always enjoys economies of scale, which again is enjoyed by all the parties in the JV. This refers back to the notion of operational synergy. Risks of Joint VenturesThere are several benefits to forming a joint venture, as detailed above, however, joint ventures can also create challenges. Forming a venture with another business can be complex in terms of the time and effort required to build the right business relationship. A new JV can cause the following problems:
When Should a Joint Venture DissolveJoint ventures are usually formed with certain defined objectives and are not necessarily intended to function as a long-term partnership. Below are some of the common reasons for dissolving a JV:
Other ResourcesWe hope you’ve enjoyed reading the CFI guide to Joint Ventures. To continue learning and advancing your career, these additional CFI resources will be helpful:
What is the business arrangement or project in which the two parties will be involved?What Is a Joint Venture (JV)? A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.
What is it called when two or more companies work together in joint ventures?A strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance agreement could help a company develop a more effective process.
What is the meaning of joint venture agreement?A joint venture is a combination of two or more parties that seek the development of a single enterprise or project for profit, sharing the risks associated with its development. The parties to the joint venture must be at least a combination of two natural persons or entities.
What do you called to an agreement in which two or more persons combine their resources in a business with a view to making profit?A partnership business, by definition, consists of two or more people who combine their resources to form a business and agree to share risks, profits and losses.
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