Understanding a Joint Venture
These days, it is becoming very common for different businesses to form joint ventures. As market regulations get more stringent and resources of companies across all industries tend to dwindle, forming a joint venture with other firms become more of a likely option for businesses. The increasing competition further makes the challenges of the times more pressing.
There are many misconceptions about joint ventures. You might be surprised to know that you might not completely know the concept. What is a joint venture? How is it different from a merger and from a partnership? Is it a good option for salvaging or redeeming your business from the difficult challenges brought about by prevailing market conditions? Correct and adequate knowledge about joint ventures is truly imperative these days.
To begin with, a joint venture is technically defined as a strategic alliance between two or more parties (or businesses/ companies) to form a new business that would facilitate sharing of resources, knowledge, assets, intellectual property, markets, and profits. A new business or operational entity is established when a joint venture between two or more companies is formed. The venture could not proceed if a company does not find a willing partner to get into the deal. The joint venture is not forever. Its existence could be limited, as specified by the joint venture agreement or contract.
A joint venture is very much different from a merger. The two concepts should not be taken synonymously. In a merger, two existing companies combine through acquisition or transfer of ownership. There is a deal to buy one company by another. In a merger, both companies could decide to pursue each other’s current operations. The management of the acquired or absorbed firm is usually terminated or re-assigned into the acquiring company (though in a different hierarchy or position). Mergers do not usually result in creation of a new business or entity. Just two companies merge. Unlike a joint venture, a merger or combination could last forever provided ownership in one would not be transferred or sold again in the future.
On the other hand, what is a partnership? Always remember that a partnership is different from a joint venture or a merger. A partnership could just be a pact or a business relationship between two or more companies. The alliance could be bonded by a formal agreement with specific terms and conditions for the continuous existence of a partnership. Partnerships often involve long-term and continuing business relationships whereas joint ventures create other business projects. In partnerships, any of the company need not swallow or buy ownership of another.
A joint venture could be formed by two or more giants in an industry. It could also be formed by two minor businesses. It could be a partnership between a giant and a small company or it could be formed by a foreign business with another local entity. In a joint venture, two or more companies agree to share resources, technology, and expertise so that a new or third-party resulting business would be formed more dynamically and actively to cover a greater scope of the market. Joint ventures could also form across various industries.