Last Updated on March 14, 2022 by Dave Schoenbeck
A joint venture, also known as a JV, is an arrangement that allows two or more businesses to combine their strengths to reach a particular goal or complete a task. Many joint venture advantages make this an attractive solution for many small business owners.
However, there are also some joint venture advantages and disadvantages to consider.
In a JV, your business might see a profit, but you’re also responsible for any costs or losses you might suffer. So it’s not something that should be taken lightly. Read on to learn more about the joint venture advantages and disadvantages at stake.
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 considering 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 challenging to quantify and track the value of each partner’s investment.
- One partner needs to have control of breaking ties in disagreements, which is difficult for partners to agree on
Joint Venture Risk Management
Although some risks exist, the joint venture advantages are enough for some business owners to leap. So if you’ve decided a JV is right for you, here are a few things you 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
- A contract 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. The answer is an informal agreement that each party will provide leads or services for the other without a contract. As a result, each party benefits, and in most cases, this should be the first step before you consider a JV.
It’s essential to consider the joint venture’s advantages and disadvantages before agreeing to a JV. To talk it over with an experienced business coach, fill out my contact form for a complimentary video coaching session. We can discuss the pros and cons of alternative structures.