A joint venture is when two or more individuals or businesses agree to pool resources to achieve a specific target. A joint venture may be investing in a new business operation or it may involve sharing certain assets for the combined benefit of both parties.
A tool for growth
It may be that in order to grow, a business will need to get involved with another one in a joint venture. By combining skills and assets, two businesses involved in a joint venture may experience growth that’s not possible when operating as separate entities. For example a store may be struggling to find investment for getting a new retail line to market. Another store may have surplus cash which it invests in return for repayment from future sales.
Common joint ventures involve the utilizing of assets, not just financial, which one business has and the other does not have at their disposal. For example, a retail store may not have enough floor space to sell a very popular line that they have at a very low cost price. A similar store may have the space and the two stores might explore a joint venture where one stocks the goods of the other, in return for a share of the profits. It may also involve a business getting into a deal where one business sources the product and the other uses their superior marketing to drive sales.
Ups and downs of a joint venture
Best practise shows that joint ventures should only last for a short time, with four years as a recommended maximum. Many disputes arise in a joint venture such as profit sharing, boundaries between parties involved and a fair share in profits. Even what constitutes a profit may lead to dispute where one business feels it is putting more into the joint venture than the other and look for a higher share of the returns instead.
With this in mind business should think long and hard before involving themselves in any joint venture. Boundaries should be clearly agreed on from the beginning and any potential problems offset before doing any long term damage. Tight legal agreements must be in force to deal with the collapse of a joint venture, especially when money is involved.
Many joint ventures give rise to successful partnerships that last for years and are mutually beneficial. Others are not as successful and this must figure in any cost-benefit analysis.