The Real Truth: Joint Venture Advantages and Disadvantages

By April 23, 2020 April 28th, 2020 Small Business Planning

Last Updated on

A joint venture, also known as a JV, is an arrangement that allows two or more businesses to combine their strengths in order to reach a certain goal or complete a task. There are many joint venture advantages that make this a tempting solution for many small business owners. However, there are also some disadvantages to consider.

a drawing of a pencil creating a new link between two other links that suggests that there is an advantage to a joint venture

In a JV, your business might see a profit, but you’re also responsible for any costs or losses you might suffer. It’s not something that should be taken lightly. To learn more about the joint venture advantages and disadvantages at stake, read on. 

What Are the Benefits of a Joint Venture?

There’s a reason so many business leaders are interested in joint ventures. For many, it can be a profitable endeavor. A few of the main  advantages are: 

  • Exposure to new markets, networks, and relationships
  • Ability to share expenses, risks, and costs
  • Adds expertise, insights, and access to human talent
  • Relatively easy to set up
  • Some tax benefits for LLCs (one of the most common joint venture advantages)
  • Allows both partners to leverage technologies, equipment, and patents
  • The contract is usually short-term and can be dissolved
  • Increases the odds of success with twice the resources and capital 

Disadvantages of Joint Ventures

Some business owners are in such a rush to jump into a JV that they don’t stop to consider the joint venture disadvantages they may encounter. Here are some of the main ones to be aware of: 

  • Potential for conflicts and misunderstandings about objectives and goals
  • Culture clash, along with mismatched management styles in each company
  • Increased risk for the partners involved
  • Disagreement about the management of deployed capital and human resources if the roles are not well-defined
  • Commitment levels of each partner are rarely equal, especially as the relationship ages and interest levels mature
  • Disagreements that arise when one partner wants to terminate before the agreement ends
  • It is very difficult to quantify and track the value of each partner’s investment
  • One partner needs to have control to break ties in disagreements, which is difficult for partners to agree on

Joint Venture Risk Management 

Although there are some risks, the joint venture advantages are enough for some business owners to take the leap. If you’ve decided a JV is right for you, here are a few things you absolutely must-have.

  • A well-written legal agreement
  • Sufficient capital and commitment to weather the length of the agreement
  • A clear understanding of how disagreements will be resolved
  • An agreement and commitment to the combined culture and management style
  • Realistic expectations and a commitment to success
  • Consistent and formalized communication between partners with the right tone

If you’re overwhelmed by the disadvantages and aren’t sure whether you want to commit, an alternative is a “strategic alliance” with another company. This is an informal agreement that each party will provide leads or services for the other without a contract. Each party benefits, and in most cases, this should be the first step before you consider a JV.

It’s important to consider the joint venture advantages and disadvantages before you agree to a JV.  To talk it over with an experienced business coach, fill out my contact form for a complimentary video coaching session and we can discuss the pros and cons of alternative structures.

 

Coach Dave

 

 

Dave Schoenbeck
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