Joint Venture: What Does It Mean?
Joint Venture is when there is a business partnership between two or more parties who combine resources to engage in a particular business activity. Joint ventures are often used for large projects where the cost of starting or carrying out the project would not be viable for one company alone. For example, consider building a new power station or refinery; such projects are usually too expensive for one company on its own. A joint venture between multiple companies can allow them to share the risk and expense of such significant investments.
It is common in oil and gas industries because they need heavy upfront capital to explore new reserves and develop them into production sites (“upstream”). They also need money to transport the product from remote locations back home (“downstream”). Partners can reduce costs significantly by creating a joint venture with another company that may have both upstream and downstream expertise. It happens by sharing resources instead of duplicating each other’s efforts on different parts of their supply chain.
JV can help ensure you have the proper support and assistance to succeed in a new market. However, entering a joint venture can also expose you to risks if done incorrectly. Here, we will examine the benefits and risks of joining a joint venture how you should ensure it succeeds.
Benefits of Joint Venture
Entering into a joint venture can have many benefits which include the following:
- JV can be an effective way to expand your business.
- You could use it as an opportunity to share the risk of starting up a new project by sharing costs and risks with other parties.
- A lack of in-house resources to carry out all aspects of your business plan. Still, there may be someone else who does have those skills or knowledge and would like to join forces with you so that both parties benefit from each other’s experience.
The Risks of a Joint Venture
The risks associated with joint ventures can be divided into two categories: those related to the partners and those related to the venture itself.
The main risks related to partners are Lack of clarity regarding each partner’s obligations, responsibilities, and rights. Moreover, there could also be a clash in management styles and techniques of different partners, leading to frequent conflict.
The main risks related to the venture are: An imbalance of capital and resources invested by partners leads to frequent arguments and conflicts of interest. Regarding this, the best way to avoid these problems is by being proactive at all stages: planning before entering into any agreement will help ensure success every time (not just when dealing with partners).
How to ensure your Joint Venture Succeeds
- Understand the risks and benefits of a joint venture.
- Understand the legal aspects of a joint venture.
- Understand the financial aspects of a joint venture.
- Understand the business aspects of a joint venture.
- Understand the personal elements of a joint venture.
An insight into the world of joint ventures can appear to be a complicated topic. Still, knowing your options when entering into a partnership with someone else is essential. It is also relevant to consider your options if things do go wrong in the future! Remember that most of the risks mentioned above can be effectively managed with alternative dispute resolution which includes arbitration and mediation. Get in touch with our experienced lawyers to address your concerns regarding these partnerships and to effectively navigate the potential risks.