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FAQ: Business Organizations and Transactions

How do joint ventures, strategic alliances and partnerships differ?

As your business has grown, you may have found that one supplier has been indispensable. Or you may have found another enterprise that would mesh well with your company's market objectives. Another entrepreneur may have approached you about forming a partnership. For whatever reasons you are considering joining forces, you should consider the options for your business endeavors.

Some possibilities for combined business opportunities include:

  • Partnerships
  • Strategic alliances
  • Joint ventures

How do these business opportunities differ?

Many companies and individual business owners choose to join forces through a partnership. In a partnership, parties agree, usually in a signed written contract, that they will share assets and liabilities from business pursuits. The partnership will last until one of the partners leaves the partnership or it is dissolved because of death of a partner or for another reason.

While partnerships generally require written agreements to protect both parties, they are an easy way for sole proprietors to leverage their business strengths for greater profit. Partnerships are common in professions such as law and medicine.

Many people assume that companies must merge to combine their interests. But several business opportunities do not require it. For instance, a joint venture does not involve parties buying interest in another business. Rather, in a joint venture, two or more businesses have a financial stake in and work together on a common objective or project. The parties will share in the profits or losses.

Through joint ventures, the businesses leverage their strengths and divide the risk inherent in their objectives. Larger businesses can use joint ventures to their advantage by working with smaller companies to develop a product or service that the larger businesses would otherwise not have the money or the time to develop.

Businesses can also leverage their strengths through strategic alliances. Strategic alliances, where two or more companies combine to achieve certain business objectives, allow any business that participates in the alliance to gain the benefits of group action. For example, strategic alliances may buy supplies in bulk for a better price or have a guaranteed purchaser for their product. Strategic alliances attempt to achieve shared objectives, without necessarily placing a financial stake in the alliance.

What should a business consider before joining forces with another company?

Before a business owner decides to work jointly with another company, he or she should consider the reasons behind a decision to consolidate. One point to consider is the desired duration of the relationship. A joint venture may be better suited for parties that want to pursue a one objective that may be outside the course of their normal business activities. A partnership will facilitate long-term arrangements to completely meld businesses.

Another point to consider is the extent to which the parties wish to become involved. A strategic alliance may work well for companies that want to obtain the influence of a larger company while remaining fundamentally a smaller organization. For parties that want greater security in a business relationship, partnership may be the better option.

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