A lucrative way for minimizing the risk of company expansion is to pool funding options with your competitor and form a joint venture. It can typically last for either one project or a group of projects but depending upon your investment, a joint venture might bring greater ROI and will allow you to achieve your business goals more quickly so that you can take on larger projects. Typically, at the time of expansion, most entrepreneurs face a dilemma: To differentiate themselves from their competitors, they should add a new product/service, a contract or a new market twice the size they have done before. But they require huge investment for such kind of business expansion, and there is no guarantee that this investment will pay off.
It has been seen that joint ventures are a trendy way to allocate the cost of expanding the business into new territory. A joint venture (JV) is considered to be an incorporated entity, in which each organization which is participating primarily depends for the entity’s debts and actions. However, unlike a merger, a JV is short-term and often sold or dissolved on project completion that brings both partners together. At a time, it might happen that your friend can actually be your competitor or at least, an organization is related to the same business line like supplier. Many businesses that are expanding find pooling resources with either one or more partners for creating a JV is the best way for minimizing risk while assisting each partner to boost both revenues and expertise. In any partnership whether long-term or temporary, mutual trust and compatibility might make or break the deal.
Pros of JVs
- The combined ROI from both venture partners is anticipated to be greater than the ROI they will be getting independently.
- For independent small organizations, joint ventures make help them in participating on larger projects.
- Resources from different organizations might help in achieving objectives and goals more effectively and quickly than resources from one.
- Venture partners can get information about adopting each other’s best practices.
- JV partners can get control on each other resources and technologies.
Cons of JVs
- JV partners can get control on each other resources and technologies.
- Entering into a JV needs the resource diversion from one’s current business.
- There are failure risks due to compatibility problems and liability for mistakes done by partners.
- JV is unlikely to succeed if both the partners are not committed deeply to the joint operations.
Now the question arises which comes first: the opportunity of business expansion, or the JV that will help in expansion? The situation varies in either of the conditions. You may already have product prototype but cannot afford hiring technical experts required for refining that product. Or you can also form a JV for conducting R&D activities in order to reach prototype stage. Often, organization that are involved in infrastructure projects build up a JV ahead of contract bidding, so that they can market the collective strength of venture. In an event, the JV partners fail to win the contract; they may still chase other projects together. Some rising market economies need that foreign companies build JVs as a method of giving employment, training and transferring technology. Moreover, plan on achieving the same owing diligence for a merger or acquisition. So, before signing a formal contract, both the partners must prepare the ground for that contract by drafting an agreement letter that might be formalized later into a legal contract.
Alcor M&A is a leading advisory firm providing financial services with an emphasis on customized solutions in the areas of M&A advisory, Joint Venture Advisory, Financial Advisory, Private Equity, Debt Financing and International Business Development. These Services leverages insights, relationships and a culture that emphasizes a strong orientation towards excellence.
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