- May 29, 2023
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Joint Ventures : You Need To Know Everything
The majority of startups are the product of extensive preparation and labour. However, few people are able to achieve the desired outcomes, and they begin to incur losses. Creating a joint venture is the best course of action in this situation. Finding a business partner that is interested in your venture and who you can work with might be beneficial. The procedure can be difficult and involves a number of pragmatic and legal issues. This article explains everything about joint ventures that you need to know before teaming up with another firm in order to assist you with the process.
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Joint Venture : What are partnerships?
In a joint venture, two or more separate commercial enterprises join together to create a legally binding endeavour. This arrangement has been made for a specified duration and objective. It could be done to complete a task, endeavour, or activity. You may describe it as a short-term agreement.
In a joint venture, two businesses pool their resources and skills to accomplish the stated objective. A contract between the two businesses is made, which controls the project. This agreement specifies the parameters of the agreement as well as how the enterprise will function and be financed.
An attorney is required for a formal joint venture since there are many legal considerations. Although it is a difficult procedure, signing agreements on a broad scale will be helpful if you want to grow.
For instance, the streaming service Hulu was a partnership between NBC Universal, News Corporation, and later Disney. Over $47 million in paying subscribers were the outcome.
Characteristics of Joint Ventures
The following are involved in a joint venture between two businesses:
- Agreement: When two or more businesses enter into an agreement, they form an autonomous unit that works towards a common goal.
- Joint control refers to the fact that both companies share responsibility for co-ventures’ administration, management, and even venture.
- Expertise and resource sharing: When businesses form a joint venture, they combine their resources, including people, money, knowledge, and technology. The firm gains a lot from this.
- Profit and loss sharing: When co-ventures form a joint venture, they consent to split the company’s earnings and losses according to a predetermined ratio. At the conclusion of the enterprise, the earnings and losses are determined. In the case of a long-term venture, the calculation is performed yearly.
- Sharing cutting-edge technology: When two businesses collaborate, one can make use of the other’s cutting-edge technology. These cutting-edge marketing or production methods reduce overall costs and raise quality.
- Dissolution: This word denotes the termination of the contract. The accounts of both businesses are settled at the moment of dissolution. The businesses are then free to operate freely.
Advantages of a Joint Venture
There are several advantages of getting into joint ventures. It helps you to grow the business faster and earn huge profits in less time. Other benefits are as follows:
- Increased capacity
- Access to the distribution network and new markets
- Sharing the costs and risks with the partner
- Access to advanced technology and greater resources
- Access to specialized staff and new expertise
Joint Venture Types
According to their needs, businesses can join four different types of joint ventures. These are covered in more depth below.
Joint Venture based on a Project
The most typical type of joint venture is this one. The businesses form a cooperation to accomplish a particular objective. It could be done to carry out a brand-new project or provide a particular service. This endeavour is time-limited and collapses after that period since it is only intended for one specific purpose. By utilising each other’s assets and resources, both businesses profit, and the risk is minimal.
As an illustration, Axon Limited, a pioneer in the creation of residential projects, formed a joint venture with Trump Industries, a major player in residential project sales and marketing. This endeavour was completed for their newest project, “Living Rise.” According to the contract, Axon Limited was tasked with constructing the “Living Rise” project. Trump Industries was tasked with handling the product’s sole marketing and sales. This joint venture qualifies as a Project-based joint venture since it was undertaken for a successful Project.
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Joint Venture based on Function
The greatest candidates for this kind of joint venture are companies that require resources and experience to finish their project. When two businesses form a functional-based joint venture, they pool their resources and skills to support one another’s activities. It does not have a name. The parties may continue to work together for as long as they choose to pursue benefits.
Accessing new markets or clients is another benefit of these endeavours. The businesses can also fill up the gaps in terms of resources and expertise.
Example: The joint venture between Bombardier and Airbus is a fantastic illustration of a functional-based joint venture. They both invested in the project to develop a C-series aircraft programme. Bombardier’s responsibility was to create the new aircraft series. In the areas of procurement, sales & marketing, and customer support, Airbus supplied knowledge and a worldwide footprint.
Joint Venture in the Vertical
This joint venture is ideal for organisations that share a supply chain. The provider is one party, while the buyer is the other. They gain as a business when two firms join this endeavour. Customers also gain from this. Despite the fact that both sides win, the buyer outperforms the providers in terms of gains. These cooperative enterprises have a high success rate. Additionally, it aids in fostering a stronger connection or link between suppliers and customers. By providing high-quality items, this eventually helps the company. Another advantage is that clients pay fair pricing for services.
For instance, the well-known beverage manufacturer Coca-Cola Co. and the Philippines’ largest brewer, San Miguel Corp., formed a vertical joint venture. They entered the partnership in order for Coca-Cola to directly own the business that makes its bottles in the Philippines. The renowned beverage manufacturer purchased the bottling facility outright in 2007. As a result, it absorbed a sizable portion of the nation’s supply chain.
Horizontal Joint Venture
This kind of joint venture involves a cooperation between two or more businesses operating in the same industry. The joint venture’s goods are used by the co-ventures, which then market them to their clientele. They could also form a collaboration to produce a good that will be sold to the same group of clients. Conflicts between the two parties frequently arise in this type of joint endeavour. Here, the venture’s two participants both make an equal profit.
The SkyTeam freight is an illustration of a horizontal cooperative enterprise. The sole collaboration between air freight businesses is this one. In the year 2000, four airlines came together to form the partnership. These include Aeromexico Cargo, Air France Cargo, Delta Air Logistics, and Korean Air Cargo. The project’s objectives were cost reduction, workforce reduction, lower gasoline expenses, and an equitable profit sharing. The businesses concurred since they owned several aeroplanes with plenty of open seats. The earnings were increased by switching to a big enterprise. Customers also profited since they were able to use the services for less money.
Joint Ventures Conclusion
Joint ventures have significantly aided businesses in improving their circumstances. Depending on their conditions and objectives, businesses can enter any of the several forms of joint ventures. It’s a fantastic technique to evaluate their potential for cooperation as well. This might provide new opportunities for cooperation and result in achievement.
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