Commercial enterprises enter joint alliances to accomplish a specific purpose by sharing their resources. Such establishments definitely have more to gain than lose by virtue of their relationship. These establishments that join hands together for effectuating a business goal are said to be in a Joint Venture.
A commercial enterprise between two or more organizations that come together to combine their resources to develop a strategic edge in the market is called a Joint Venture. Companies often join hands in a JV to accomplish specific projects. The JV Contract may be formed to carry out a proposal with identical products or services or it may be related to an entirely new project with completely different core business activities. Most often a JV is a temporary partnership that comes into existence for executing a specific business deal.
JV Contract
These business deals are effectuated by means of contractual agreements between the parties entering the JV. The profits and losses that occur are eventually shared by the parties as stipulated in their contracts. The agreements also delineate the other terms and conditions of the relationship, the roles and responsibilities of the parties concerned, the costs to be borne by each of them, and the business structure of the venture.
In this blog we’ll know the advantages of Joint Ventures.
Advantages of JV Contract:
The parties concerned typically pool their resources and expertise and undertake a project which otherwise would not have been possible to have carried out on their own. By participating in a JV, the parties can share the risks, rewards, and liabilities of the venture. This is one of the major reasons corporates enter into JVs. Additionally, a JV could also present several other benefits as elucidated below:
1. Sharing of Investment:
The parties of a JV contribute a certain amount of the initial investment to develop the project. The amount depends on the terms of the contract signed by the parties. This would undoubtedly alleviate the financial burden falling on a single party
2. Sharing of Expenses:
The parties share a common reserve of supplies which can reduce the overall costs involved. Sharing of costs could greatly enable the parties to establish and launch the business at a faster pace
3. Knowledge Transfer:
The parties involved often have their own expertise and each of them brings their specialised knowledge to the table to institute the JV together. This would make the Joint Venture Agreement strong enough to withstand the competition in the market
4. Exploring New Markets:
A JV brings forth businesses a plethora of opportunities to enter new markets at a lightning speed. The party that belongs to the locality takes care of the marketing and logistics which otherwise could have been a huge challenge for other parties that do not belong to the respective locality.
Usually, in a JV, there might be two parties, wherein one of the parties is headquartered in country ‘A’ and another party in country ‘B’. The JVenture would enable party A to expand its product portfolio into the market of country B quite effortlessly
5. Opening of New Revenue Systems:
Most businesses in their nascent stages thrive with limited resources and have minimal capital for growth projects. When small businesses enter a JV with big organisations, the former can expand and establish itself quickly. The business also gets access to the extensive distribution channels and diversified revenue streams of the bigger company
6. Access to Intellectual Property:
Developing Technical expertise in-house might be a challenge for several businesses. Therefore, small businesses sign JV with technology giants to gain access to their Intellectual property assets. Without this, having to develop the products technically could cost them a fortune.
Likewise, a company that is financially strong can enter into a JV with a company that is technically sound to fund their research. In such circumstances, it is definitely a win-win situation
7. Collaboration Benefits:
JV offer the same kind of benefits that larger companies look for in Mergers and Acquisitions. It could be a financial or operational benefit that the companies specifically look for. While offering financial support, could reduce the cost of capital, offering operational support could improve the operational efficiency of the business venture
8. Excellent Credibility:
It is not an easy task to gain the credibility of clients and build a robust customer base, especially for small businesses that are new to the market. For such companies, establishing a JV with a larger and more well-known brand could prove to be very profitable
9. Challenges in Overcoming Competition:
JV help organisations to dilute their challenges in facing competition and pricing pressure. Strong JV could establish barriers and boundaries against tough competitors, thus making it possible for businesses to explore new markets
10. Improved Economies of Scale:
Economies of Scale is defined as the advantage over the costs experienced by a firm when it increases its output level. The parties in a JV share the economies of scale enjoyed by the bigger company in the alliance
Thus, JVs offer an endless list of possibilities for businesses. However, it is not without disadvantages. For instance, the objective between various parties involved in a JV may be vague. The level of expertise, knowledge, and investment between the parties may not be on par. Further, the contractual limitations of JVs may pose a threat to the core business operations. However, it must be accepted that the pros outweigh the cons clearly when JVs are concerned. Hope the advantages of the JV Contract topic were clear in this blog.
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