As an alternative to a business merger or acquisition, forming a joint venture is a common business strategy used among companies seeking to achieve a common goal or reach a specific consumer market. Entering into a joint venture involves two or more businesses coming together under a contractual agreement to work together on a specific project for a certain period of time. Businesses work as partners and pool resources to make the project profitable for all parties involved.
When a joint venture is successful, participating companies share in the profit as agreed upon in the initial contract. Likewise, a failure in a joint venture results in all participating companies realizing their portion of the losses. Forming a joint venture has unique benefits that make it an attractive option for some businesses.
Shared Resources and Responsibilities
More often than not, a company enters into a joint venture because it lacks the required knowledge, human capital, technology or access to a specific market that is necessary to be successful in pursuing the project on its own. Coming together with another business affords each party access to the resources of the other participating company without having to spend excessive amounts of capital to obtain it.
For example, Company A may own the facilities and manufacturing production technology that Company B needs to create and ultimately distribute a new product. A joint venture between the two companies gives Company B access to the equipment without purchasing or leasing it, while Company A is able to participate in production of a product it did not incur costs to develop. Each company benefits when the joint venture is successful, and neither is left to complete the project alone.
Flexibility for Participating Companies
Unlike a merger or acquisition, a joint venture is a temporary contract between participating companies that dissolves at a specific future date or when the project is completed. The companies entering into a joint venture are not required to create a new business entity under which the project is then completed, providing a degree of flexibility not found in more permanent business strategies. Also, participating companies do not need to give up control of their businesses to another entity, nor do they have to cease ongoing business operations while the joint venture is underway. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.
Shared Business Risk
Joint ventures also provide the benefit of shared risk spread among participating companies. The creation of a new product or delivery of a new service carries a great deal of risk for a business, and many companies are not able to manage that risk alone. Under a joint venture, each company contributes a portion of the resources needed to bring the product or service to market, making the heavy financial burden of research and development less of a challenge. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed among each of the participating companies.
(For related reading, see: What are the primary disadvantages of forming a joint venture?)