Pros and Cons of Joint Ventures

A joint venture involves two or more people or companies entering a formal agreement for a particular business project or undertaking. Its short-term nature distinguishes it from partnerships. The ability to create synergy with another company through shared expertise is a primary benefit, while overcoming cultural and communications barriers are key drawbacks.

Joint Venture Pros

As The Hartford notes in its Business Owner's Playbook, a joint venture may create business advantages. In some cases, a joint venture helps a company create a business opportunity that otherwise wouldn't exist. An American company might have to establish a joint venture with a company in a foreign land to be able to set up overseas operations, for instance. A joint venture also allows a company to overcome weaknesses or entry barriers by plugging them with the other party.

Business growth also can require financial, time and resource investments. Sharing these requirements with one or more other entities in a joint venture helps spread out those risks relative to going it alone. Another company may have key contacts or access to resources in areas that you don't.

The predefined timeframe of a joint venture also is a plus for companies that prefer not to form a long-term partnership. The parties involved can share the profits in an agreed-upon way, but also leave open the opportunity for exit if the venture isn't rewarding.

Joint Venture Cons

Because of their inherent time limitation, a joint venture is going comes to an end barring an extended agreement of some sort. A partnership may generate more long-term buy-in because participants are tied to each other for the ultimate success of the business. With a joint venture, a particular party may opt to disengage from the venture but remain steadfast in operating its own business.

Primary challenges, however, center on problems with company leaders agreeing on the best strategy plans for the venture. Also, when two organizations with different cultures and values combine for a single venture, natural barriers to cooperation and communication exist. To avoid having these barriers impede success, the parties should perform due diligence to ensure adequate alignment prior to entering the venture.