What is a joint venture? Definition, advantages, features

29 Apr 2022
Estimated reading time : 3 minutes
What is a joint venture? Definition, advantages, features
29 Apr 2022
Estimated reading time : 3 minutes

A Joint Venture is an association between two or more companies with a common goal to optimise strategic expertise, skills and resources.

This pooling covers a more or less long-term horizon and is based on an agreement concerning the purpose and the resources committed, which may be formalised by a contract, without necessarily giving rise to the creation of a new legal entity.

When and why should you choose a joint venture?

The search for synergies is one of the main motivations for joint ventures. In practice, these synergies can be of various kinds.

It may involve pooling technological expertise or patents, with a view to creating a new innovative product, or offering a new service if the companies operate in the same sector.

Joint ventures may be motivated by the sharing of or access to strategic resources essential to the continuity of activities, or by the merging of production sites. From a commercial point of view, the joint venture can be set up to increase the volume of sales by combining distribution channels. The effect of size may also come into play: some markets will be more accessible to players with a dominant position and enhanced reputations.

Agreements between companies of different nationalities make it possible to remove the obstacles to a new organisation by relying on a local partner. For example, regulatory obstacles that complicate access to certain markets.


What are the advantages and disadvantages of a Joint Venture?

The advantages of the Joint Venture are primarily its legal flexibility.

It is an agreement that can take different forms, in particular the joint venture does not require the registration of a new company. The companies sign a partnership agreement while maintaining a certain independence which they can fully return to once the objectives of pooling resources are considered to have been achieved.

From a strictly financial point of view, the union of several companies allows, in theory to generate economies of scale and synergies from combining production facilities, and thus reduce costs that could have been prohibitive if they had been incurred by a single company.

Finally, the risks can thus be diluted for a substantial expected return on investment in the long term.


However, this form of cooperation has its limits and disadvantages.

Companies must be able to establish a well-defined management roadmap and, above all, to maintain it over the duration of the contract.

A merger between several companies with potentially different corporate cultures carries a risk of divergence in strategic vision, and may hinder the achievement of the desired benefits. If, in the course of the process, it turns out that this original view is no longer shared by all partners, the efforts and energy mobilised would have been in vain.


What are the crucial factors for a good project implementation?

Management must emphasise clear delineation of common issues and mutual obligations.

In addition to its strategic relevance, the purpose of the joint venture must be precisely determined before the new structure is formed, so that each partner shares the same interpretation of the issues at stake.

In its implementation, this visibility will be one of the significant factors for the success of the company: In this respect, internal communication within the various entities, as well as inter-entity communication, must be equally educational and consistent.

If the corporate cultures are different, and especially if the companies use different languages, management will have to anticipate the probable difficulties in coordination.


Read our merger and acqusitions guide and related articles to become an expert on external growth!