Joint ventures are becoming an increasingly popular alternative to traditional mergers and acquisitions. According to a survey by McKinsey & Company, 68 percent of organizations expect that their joint venture activity will increase over the next 5 years.
But what is a joint venture exactly, and is a joint venture the right move for your business? In this article, we’ll discuss the pros and cons of joint ventures, so that you can make the decision that’s best for you.
What is a Joint Venture?
A joint venture is a business relationship and strategic alliance between two or more entities in which all parties retain their distinct identities, rather than merging with each other. These entities work collaboratively on the establishment of a new business or company, sharing the profits, losses, ownership, and risks.
Some of the most well-known joint ventures are:
Hulu, a joint venture between entertainment companies Disney and Comcast.
Vevo, a joint venture between record companies Universal Music Group, Sony Music Entertainment, and EMI.
Sony Ericsson, a former joint venture between technology companies Sony and Ericsson before Sony acquired Ericsson’s shares in 2011.
Joint Venture vs. Partnership vs. M&A: Which is Right for You?
Joint ventures, partnerships, and M&A deals are all cases where two or more business entities come together—but each of them is a distinct phenomenon.
A business partnership is typically made up of two or more people, whereas a joint venture is a collaboration between two or more businesses. One common example of a partnership is a law firm where the “partners” have their name on the business.
Partnerships are also distinct from joint ventures in the fact that they are usually intended to be a long-term business. Joint ventures, on the other hand, are typically oriented toward a single objective. For example, Uber and Volvo have formed a joint venture for the sole purpose of researching self-driving cars.
Like business partnerships, mergers and acquisitions are typically intended to last indefinitely. M&A deals represent a complete merging of two business entities, including their assets and liabilities. Joint ventures are preferable for projects that are limited in time and scope, while M&A transactions are better when one party wants to have control over the other party’s business.
The Pros and Cons of Joint Ventures
The pros of joint ventures include:
New ideas and resources: Partnering with another company can give you the opportunity to explore new possibilities and gain access to new expertise, resources, and technology. This allows both parties to achieve things that they may not have been able to do on their own.
Temporary partnership: Short-term joint ventures can be a good way to explore the possibility of a more long-term business relationship. If you find that this experiment isn’t working out, you aren’t stuck with a lengthy and expensive divorce process, as with an M&A deal.
The cons of joint ventures include:
Inherent risk: Embarking on a joint venture might expose you to greater risk. You’re working with a different entity with separate goals and ways of doing work, and you don’t have control over the internal operations of the other party. What’s more, it may be difficult to exit the partnership early based on the contract you’ve signed.
Security: Joint ventures typically require both parties to share confidential information with each other, such as financial statements and intellectual property. However, this can be a security risk if you don’t take the proper steps to protect yourself.
If you’re concerned about data security for your next joint venture, consider using a virtual data room (VDR). VDRs are secure online repositories for storing and sharing sensitive files and data. With features such as access logs, user authentication, encryption, and watermarking, VDRs ensure that you can view and exchange the information you need to make your joint venture a success.