A joint venture, often abbreviated as “JV”, is a commercial enterprise or business arrangement undertaken jointly by two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. Although JV’s are individual in nature and unique to the specific circumstance, they are common in mergers and acquisitions and share a number general characteristics such as
- shared ownership
- shared returns
- risks
- shared governance
In a joint venture (JV), each of the participants is responsible for profits, losses, and costs associated with it. The parties however retain their distinct identities, thus the venture is its own entity, separate from other business interests.
Reasons for Choosing Joint Venture
There are various reasons why companies may choose to form joint ventures in preference to an alternative structure such as a subsidiary by way of an acquisition. They may also be used as a form of shark repellent.
Reduce Risk
As risk is shared, investments in major projects can be more easily digested by the firm whilst profiting from the benefits
Leverage Resources
Different firms have different strengths such as a superior manufacturing process or access to superior distribution channels. This combination may allow access to a new market, or emerging market either by product or territory.
Accounting Benefits
Certain accounting practices under GAAP may allow the investors to report performance in such a way as to engineer a preferable tax environment.
Cost Savings
Efficiencies of scale can be achieved by combining assets and operations. Combining companies can leverage their production facilities and generate a lower per-unit cost than they could have achieved separately.
Combined Expertise
Access to additional skills and capabilities in the joint venture might come from each party having unique backgrounds, skillsets, and expertise. Through a JV, each company benefits from the combined expertise and talent within the entire pool.
Requirements for a Joint Venture
In order to achieve the benefits listed above, the following key elements are often cited as being critical to the success of a joint venture
- The number of parties involved
- The scope (geography, product, technology) in which the JV will operate
- Clearly defined contribution required from each party
- The structure of the JV
- Initial and future contributions and ownership split of each party
- The kind of arrangements to be made once the deal is complete
- How the JV is controlled and managed
- Who will control and manage the JV
