Drawbacks of Joint Ventures

Joint ventures are a form of strategic alliance that can be described as a collaborative effort in the form of legal entity like a corporation, partnership or limited liability company. The elements common to joint ventures include community interest in the subject of the undertaking, sharing profits and losses, equal right to direct and control the decision of each other and of the joint venture, and fiduciary relation between or among the parties if participants are more than two persons. Entering into joint ventures can cause additional burdens and risks, the following are the drawbacks of this strategic alliance:

1. Loss of competitive advantage - Joint ventures, acquisitions, and alliances with an actual or potential competitor may jeopardize the cooperative advantage that a business might otherwise have developed in the absence of the relationship. As a participant, it is important for you to evaluate whether your goals and business opportunities can be achieved even without assistance of competitors or whether the price of such opportunities and goals is excessive in light of the overall business objectives of the entity.

2. Lack of control – Two or three heads is better than one, they say. But no matter how the alliance is structured, participants inevitably will lose some aspect of control over the project. In order for participants to gain, they must also give something up. If you want your business to work-out, you need to simultaneously structure the management in such a manner as to retain as much control as possible without affecting the project and carry out due diligence on the participants to ensure a level of trust amongst them. Each partner must contribute complimentary skills and resources in an ongoing relationship offering mutual benefits.

3. Governmental relations – Some joint ventures involve alliances formed with foreign entities. This kind of relationship can lead to substantial opportunities for a growing business but must also be mindful of local regulations and governmental review procedures that may affect the activities of the participants.

4. Time consuming – For some people, entering to new venture is time-consuming. Getting to know another participant also entails difficulties. If you think, adjusting to new business participant/s is tough, better drop the idea of entering a joint venture.

5. Increased managerial burden – Shared control on a business may increase management time and a risk of deadlock looms among co-venturers. Managerial burdens are heightened as the number of co-venturers increase. To avoid this kind of scenario, a business has to have a carefully drafted joint venture agreement that can minimize and even eliminate the problems twisted by shared control.

6. Loss of management autonomy – Choosing a joint venture structure entails some loss of autonomy for the co-venturers with respect to the project.

7. Co-venturers are jointly liable for each other’s negligence – Perhaps the most difficult part of a joint venture is that the law does not generally recognize joint ventures as general partnerships. This means, the selection of the joint venture business form involves exposure to liability for the wrongdoing of the other co-venturer.