What is Joint Venture (JV)? Types, Advantages and Disadvantages

Joint Venture

A joint venture is a strategic alliance and business relationship between two or more entities in which all parties retain their separate identities rather than merging. These entities work together to establish a new business or company, sharing profits, losses, ownership, and risks. The ultimate goal of every business is to increase their bottom line (net profits) and continue to expand into new market areas. Which will provide them with a larger customer base and better resources.

Some of the most well-known joint ventures are:

  • Hulu is a joint venture between Comcast and Disney in the entertainment industry.
  • Vevo, a joint venture between Universal Music Group EMI and Sony Music Entertainment in the record companies.
  • Sony Ericsson, a former joint venture between Sony and Ericsson before Sony purchased Ericsson’s shares in 2011.

Purpose Of The Joint Venture

Parties in a joint venture achieve their business goals which would be harder or costly to achieve independently. When a joint venture is confirmed with an ideal partner. This helps the party leverage the other partner’s resources to gain access to new markets. Sharing each other’s capabilities or strengthening their position in the current market in order to diversify into new businesses.

Types Of Joint Ventures

There are four important types of the joint venture that the companies practice:

  1. Project-based joint venture- This type of JV where the parties come together with a motive to achieve a particular task.
  2. Vertical Joint Venture– This type of JV where the parties are at a different level, positions of the same product and decide to come together in a JV
  3. Horizontal Joint Venture– This is a form of a joint venture in which the participants are competitors who decide to come together
  4. Functional-based Joint Venture–This is a form of a JV in which the parties join up to benefit from their mutual synergy.
Joint Venture vs. Partnership Which is Right for You?

Joint ventures and partnership deals are cases where two or more business entities come together, but each is a distinct case.

A joint venture is a collaboration between two or more firms, whereas a business partnership collaborates between two or more persons. A legal firm is a good illustration of a partnership because the “partners” have their names on the company.

Partnerships are also different from joint ventures because they are usually intended to be a long-term business. On the other hand, Joint ventures are usually focused on a single goal. Uber and Volvo, for example, have formed a joint company solely for the purpose of researching self-driving cars.

Like business partnerships, acquisitions and mergers are typically intended to last indefinitely. Joint ventures are preferred for projects with limited time and scope.

The Advantages of joint ventures include:

One of the most significant joint venture benefits is that it can help your company grow faster. Increase productivity, and generate more profits. Other advantages of joint ventures are as follows:

  • New ideas & resources: Partnering with another firm can help you discover new opportunities and gain access to new expertise, technology, and resources. This enables both parties to accomplish goals they might not have accomplished on their own.
  • Short-term:  joint ventures can be an excellent approach to explore the possibility of a longer-term business relationship. If this experiment doesn’t work out, you won’t have to go through a time-consuming, and costly withdraw process.
  • Both parties share the risks and costs: In case the joint venture project fails, you are not alone to bear all the loss. Because you two had volunteered to share the expenses, you both will also support the losses.

The Disadvantages of joint ventures include:

Joint ventures can pose significant risks in terms of liabilities as well as the possibility of conflicts and disputes between partners.

  • Inherent risk: Embarking on a joint venture might expose you to risk. You’re collaborating with a different entity with its own goals and methods of operation. And you have no control over the other party’s internal operations. In addition, depending on the contract you signed, it may be tough to leave the partnership before the project gets complete.
  • Different cultures and management styles lead to poor integration and cooperation.
  • Security: Joint ventures needs both parties to share confidential information, such as financial statements & intellectual property. However, this can be a security risk-sharing confidential if you don’t take the proper steps to protect yourself in the backup.

Consider using a virtual data room(VDR) if you’re concerned about data security for your next joint venture. Secure online repositories for sharing and storing sensitive files and data are known as virtual data rooms or VDRs. VDRs ensure that you can view and exchange the information you need to succeed your joint venture with features like access logs, user authentication, encryption, and watermarking.

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