A joint venture is a partnership of two or more organizations. When does it make sense to consider a joint venture and what are the risks versus the rewards?
Joint ventures can help your company grow and expand into new markets, but they can be highly complex and require excellent communication between each partner.
Most joint ventures come about from companies with a common customer in mind, and they are usually temporary or project-based partnerships. Often times they offer a cost effective solution to an outright purchase or acquisition of another company while still providing access to the expertise required for growth.
A joint venture might gain you access to new geographic markets. Since different countries have different laws and regulations, it might prove more cost-effective to partner with a company that is already established in another country to sell and distribute your products.
A joint venture can get you access to another company's customer base. Barnes & Noble conducted a study that revealed the longer customers stay in their stores, the more items they purchase. They struck a deal with Starbucks to have cafés inside their bookstores so customers would stay longer while they read books, magazines, and newspapers, which increased sales over time.
A joint venture can also serve to fund growth and new technologies. GM, Toyota, and BMW once joined forces to develop a line of new transmissions to share R&D costs as well as expertise to create a product aimed at global certification. Development of new transmissions is very expensive and often geared (pun intended) towards specific markets like the US, Europe, and Asia. The joint venture saved each company billions of dollars in R&D costs.
Whether a joint venture involves Fortune 100 companies or small businesses, there are some common Pros & Cons to have on your radar:
- Easy to set up
- Reduced/shared costs
- Access to established expertise and additional staff without huge expense
- Additional potential tax benefits for LLC's and LLP's
- Access to new markets
- Ability to leverage established technologies and patents
- High potential for conflicts between and within the partnering organizations
- Clash of corporate cultures and management styles
- Increased risk, liability, and exposure for all parties
- Mismanagement of capital and resources due to lack of understanding of each company's role in tactical execution of the agreement
- Unclear/non-specified objectives can lead to an uneven division of labor, profits, and losses between partners
- The exclusivity of the joint venture can often impede or slow individual partner growth due to conflict-of-interest clauses and non-compete related concessions for the duration of the agreement
The success of a joint venture seems to increase when there is a common goal, clear communication between all parties, shared/reduced costs, and an obvious upside to all of the partners involved.
If the pros outweigh the cons, execute a crystal clear joint venture operating agreement from the beginning to ensure success.
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About the Author:
David B. Nast owns FocalPoint Business Coaching & Corporate Training based in Cherry Hill, NJ. David is an Award-Winning Certified Business Leadership Coach with over 20 years of experience in Executive Coaching, Leadership Development, Corporate Training, Career Coaching, Executive Search, and Human Resources. He has coached thousands of CEOs, Business Owners and Executives.