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Advantages of a Joint Venture

Friday, 27 January 2012

Most business people are familiar with basic legal structures such as partnerships and limited companies. They are usually also aware of the pros and cons of a choosing a particular corporate vehicle whether it is for tax or liability reasons. A lesser understood concept is the joint venture. Although more complex in terms of legal and business relationships; in the right circumstances, joint ventures can present a number of advantages.

The starting point for many businesses considering a joint venture is the potential for cost savings. Saving operating costs is often cited as a major factor when two businesses pool resources to achieve a common objective. Globalisation has fuelled this as the increasing size of accessible markets means that businesses can benefit from economies of scale and customer reach that a sound strategic partnership can bring.

Another advantage high up the list of priorities is expanding a business' customer base. A company with a powerful distribution network in a different geographic area can be a significant advantage for a producer attempting to access that market. This can be particularly important for entry into developing economies where an understanding of local markets, language and business practice can make a direct approach impractical.

Inherent in the idea of a joint venture is sharing risk. The financial risks associated with undertaking a project of unusual size and complexity, particularly if speculative in nature, is a good incentive for businesses to sacrifice some potential reward to protect them from a proportion of the down-side risks.

One industry where joint ventures are commonly used is technology. With the rapidly developing nature of technology, businesses often need to work closely to gain access to what is considered "organisationally embedded knowledge". Similarly, technological advances can create access to new markets which a single business may not have the resources to effectively exploit. If it can cooperate with a complimentary business, combined success may be more likely.

Other reasons for using joint ventures include: creating a structure for financing projects with leverage while avoiding balance sheet consolidation, catalysing an eventual sale of business or acquisition, or even simply to bring about cultural change within a business.

As with any business strategy, there are specific risks to be considered with joint ventures and we advise companies considering one to take appropriate legal advice. Rollingsons has lawyers experienced in company law matters so if you need advice or would like more information please contact James Crighton via e-mail or by phone on 020 7611 4848.