Joint venture is a commercial arrangement between the two or more than two parties in which the parties come together to pool their assets with the objective of completing the specific task where each of the parties has joint ownership of the entity and is responsible for the costs, losses or profits that arise out of the venture.
What is Joint Venture (JV)?
Joint Venture Definition – When two or more business entities come together to achieve a common purpose, it’s called a joint venture.
- A joint venture can be for a singular purpose or can be an on-going purpose.
- In a JV, the business entities share their resources, assets, equity to make the venture successful. While getting into the JV, they also sign an agreement that binds them to share the results of profit/loss, management, etc.
- Sometimes, two or more business entities come together and form a new entity altogether for their JV. In that case, they call it partnerships, corporations, or limited liability companies.
- Sometimes, these business entities keep their own individual identity and go for a JV with a joint venture agreement.
- In most cases, the JV is initiated to achieve a single purpose like research or production of certain products. But JV can also be formed for an on-going purpose.
Examples of Joint Ventures
In this section, we will look at a few real-life examples of Joint Venture.
#1 – Google’s Verily Life Sciences – GlaxoSmithKline Joint Venture Example
Google’s parent company Alphabet and GlaxoSmithKline announced that they would associate themselves with a joint venture in the ratio of 45%-55% to produce bioelectronic medicines. Both of these companies got committed for 7 years and Euro 540 million.
#2 – Volvo Uber Joint Venture Example
Recently, Volvo and Uber have also announced that they would form a joint venture to produce self-driving cars. The ratio would be 50%-50%. As per the agreement, they are doing a $300 million investment for this JV.
#3 – Bank’s Digital Currency Joint Venture Example
Recently, even banks formed a joint venture to create something new. Four world-class banks – Deutsche Bank, UBS, BNY Melon, and Santander came together in a JV to produce a new form of digital cash. The purpose of this JV is to create an alternative to the bitcoin using the same blockchain technology.
Advantages of Joint Venture
As we can see there’re many advantages of a joint venture. Let’s have a look at the top advantages of forming a JV –
- Advanced resources: The idea of the JV is to combine the strengths of each unit in such a way that the weaknesses of both of these units get subsided. As a result, every unit is able to use advanced and more specialized resources, staff, and technologies.
- Risks and costs are distributed: In business, every company has to bear its own costs and risks. But in the case of a joint venture, two or more parties share the risks and costs as per the agreement. As a result, the chances of failure get reduced to a large extent.
- Temporary agreement: A company has a perpetual entity. But in the case of JV, two or more companies come together for a temporary joint venture agreement to produce something new. As a result, none of the companies is bound in the commitment for a long period of time.
- Form long-lasting business relationships: Even if the JV is a temporary arrangement, by associating with a business or two, you’re able to form long-lasting business relationships with other associates.
- You will be able to sell your portion: 80% of all JV end up in a sale. When two or more companies form a JV, it’s for a particular purpose. Once the purpose is served, one company can sell the part of its share to another partner.
- Your potential would be unlimited: Since you would be able to use resources, technologies, staff, to an optimum level, the production capacity and the potential of the venture would be almost unlimited. The only thing that is required is proper due diligence.
Disadvantages of Joint Venture
As there are many advantages of going into a JV, there are also some disadvantages of joint ventures. Let’s have a look at those –
- No equal involvement: It often happens that while running the JV, the involvement of two or more companies isn’t As a result, there can be discrepancies and commitment issues.
- Cultures are completely different: Since two or more companies would come together in a single setting, a clash among cultures can be predicted. As a result, the singular objective may get affected.
- Lack of direct communications: In a JV, there can be chances of misunderstandings and miscommunication. Since two or more companies come together for a single purpose, it’s difficult to maintain direct communication among the employees of the separate companies.
This has been a guide to what is Joint Ventures, joint venture definition along with real-life joint venture examples of Volvo Uber, Google Glaxo, and others. Here we also discuss JV Advantages and Disadvantages. You may also look at the following articles to learn more about M&A