Understanding a Joint Venture

Understanding a Joint Venture

Understanding a Joint Venture

Although a joint venture (JV) is a partnership in the informal sense of the word, it can be created using any legal structure: Corporations, limited liability companies (LLCs), Partnerships, and other business entities can all be used.

According to our experts on multifamily real estate joint ventures, although the purpose of a JV is generally for production or research, one can also be constructed for a continuing goal. In addition, JVs can connect large and small companies to take on one or multiple projects and deals. Here are the four primary reasons why businesses form JVs.

To Leverage Resources

A JV often takes advantage of the merged resources of both organizations to attain the venture's goal. For instance, one business might have a well-established manufacturing operation, while the other might have excellent distribution channels.

To Lower Costs

By utilizing economies of scale, both parties in the JV can leverage their production at a lower per-unit expense than they would individually. This is especially appropriate with technological advances that are expensive to implement. Other cost savings resulting from a JV can include sharing publicity or labor expenses.

To Combine Expertise

Two organizations or parties creating a JV might each have diverse backgrounds, talents, or expertise. Combined through a JV, each party can profit from the other's mastery.

To Penetrate Foreign Markets

Another everyday use of JVs is to partner with a local company to enter a foreign market. For example, a business that wants to expand its distribution network to different countries can enter into a JV agreement to provide products to a local company, thus profiting from an already existing distribution grid. In addition, some countries restrict foreigners from entering their market, making a JV with a local company the only way to do business in the country.

How to Arrange a JV

Regardless of the JV arrangement, the most significant document will be the contract that lays out all of the privileges and responsibilities of each party to the venture. The goals, the initial contributions of each party, the daily operations, the right to the proceeds, and the accountability for losses are all laid out in the JV agreement. Therefore, it is essential to draft it cautiously to avoid jeopardizing litigation in the future.

Advantages and Disadvantages of a JV

A joint venture allows each party to use a new business prospect without accepting all of the expense and risk. Joint ventures, by nature, are more dangerous than business as usual, and sharing the threat is a smart move.

If the right players are involved, the joint venture also begins with a broader base of knowledge and talent pool than any one party has on its own. So, for instance, a joint entertainment venture arranged by an animation studio and a streaming content provider can get off things accomplished more quickly—and likely with a better possibility of success—than either party could alone.

On the other hand, launching a joint venture demands relinquishing a level of control. This is because two or more parties are making vital decisions. The parties involved must go into the undertaking with the same objectives and an equal level of commitment. Radical differences between the players' company cultures and leadership styles can hinder success.

Arranging a joint venture multiplies the number of leadership teams affected. For instance, if one player undergoes a substantial change in its business arrangement or executive unit, the joint venture might get lost in the shuffle.

We hope this helps you better understand JVs. So contact us today to learn more about multifamily real estate joint ventures. We want to be the reason you succeed!

To Top