What Is A Joint Venture Agreement What Are The Pros And Cons Of It

What Is A Joint Venture Agreement? What Are The Pros And Cons Of It?

Small Business 5 Mins Read December 30, 2023 Posted by upasana sarbajna

A joint venture agreement is a type of business agreement where two or more parties come into an agreement to pool all of their resources. They have the same purpose to accomplish a particular task. This task might be a brand new project or any other business activity.

Each of the participants in a joint venture agreement would be responsible for their own profits and losses and the costs that are associated with them. However, the joint venture is a completely different entity of its own. Therefore, it stays separate from the business interests of the participants.

In this article, we shall discuss everything that is associated with a joint venture agreement. And we’ll see if it is a profitable decision for businessmen to make.

Key Takeaways

  •  In a joint venture agreement, more than one business decides to come together to combine their resources for a particular goal.
  • In the colloquial sense of the word, they are a partnership. However, they may take up any legal structure.
  • One of the most common purposes of a joint venture agreement is to partner up with local businesses to enter into a foreign market.

Understanding A Joint Venture Agreement

The joint venture agreement is only in the colloquial sense of the word; one can form it using any legal structure: partnerships, corporations, limited liability companies, or any other business entity.

Despite the fact that the main purpose of a joint venture agreement is mainly for research or production, they may also be formed for continuing purposes. Joint ventures may combine both big and small companies to take up multiple deals and projects.

Here are the main reasons why companies decide to form a joint venture agreement

To Leverage Their Resources

A joint venture can easily get the advantage of the combined resources of all the participating companies to reach the goal of the venture. Not every company has perfection in all of its resources. While some may have the best of the production sources, others might excel at distribution. A combination of all of these resources may yield the best possible results.

Reduces Cost

The cost that the company may have to incur individually to reach a goal may be a lot in comparison to a joint venture. Therefore, entering into a joint venture agreement may be beneficial for all of the participating companies. In a joint venture, they may be able to share all of the costs and expenses to reach the goal.

To Combine The Experts

It is not possible for every company to excel at everything. While some may lack expertise in production, others may lack it in distribution or finances. A joint venture agreement brings together all of these companies to form a pool that combines the expertise of all these firms for a better reason.

To Enter Into The Foreign Markets

For businesses to expand, it is important that they enter into the foreign markets. However, it is never easy. This is where a joint venture agreement steps in. A company that wishes to expand its distribution to new countries can easily enter into a joint venture agreement with the local businesses. Therefore, they get the benefit of an already existing distribution channel. There are countries that restrict the entry of new businesses into their markets. Therefore, entering into a joint venture is the only easy way to do business in those areas.

Setting Up Of A Joint Venture Agreement

Regardless of the structure, the most vital document is going to be the agreement which sets all the obligations and rights of each of the participants into the venture. The initial contributions of the parties, the objectives, the everyday operations, the rights over profits, and the accountability for losses are all there in the joint venture agreement. It is necessary to draft the agreement with care to make sure there is no confusion down the road.

Pros And Cons Of A Joint Venture Agreement

This agreement gives each of the participants in it the opportunity to explore new business ventures without having to bear the entire cost and risk. By nature, a joint venture is pretty riskier in comparison to a business. Therefore, sharing the risk is a clever move.

If there is involvement of the right parties, the joint venture would start out with a wider base of knowledge and a pool of talent than what an individual participant would have on its own. For instance, a joint venture for entertainment which is set by any animation studio along with a streaming content provider may take off pretty quickly, and with a better opportunity of success. Neither of the participants could ever do it to such a level all alone.

However, There Are Cons Of A Joint Venture As Well

Getting on board with a joint venture agreement needs renouncing a degree of control. Most of the important decisions are taken by more than just one party. This is where conflicts arise.

All of the participants who enter into this agreement must have one single goal along with the same degree of commitment.

Tremendous differences between the company culture and management styles of the participating companies may cause a barrier to success. Will each of the executives in the animation studio be able to communicate in the same language as the executives of the digital streaming platform? There is a chance that they might. Or, they may just land up in opposite camps.

Entering into a joint venture means multiplication of the number of management teams. Even if one party goes through a structural change, the venture may get lost in the shuffle. Therefore, entering into a joint venture is more of a well thought and calculative process than being a short term one.

The Bottom Line

A joint venture agreement between companies may open the road to expansion into a complete new line of business; for each of the participants at a pretty less cost. In fact, it sounds pretty ideal when each of the companies contribute their piece of expertise while the cost splits among them all.

However, it is only ideal when the companies share the same vision and equal commitment. Only then a joint venture can succeed.

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Upasana is a budding journalist who has a keen interest in writing. She considers writing as therapeutic and is most confident when she writes. She is passionate about music, movies and fashion. She writes in a way that connects with the audience in a personal level. She is optimistic, fun loving and opinionated.

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