Difference between joint venture and acquisition
This article discusses the difference between joint venture and acquisition. While a joint venture is a co-operation of two or more individuals or businesses in which each agrees to share profits, losses and costs to accomplish a specific task, an acquisition represents a transaction where one firm acquires another firm. In a stock acquisition, the acquiring firm is assuming ownership of both assets and liabilities and any rights and obligations arising out of it.
A joint venture is usually entered into for a short or determined period of time and for a special purpose such as a project or a new business activity
In a joint venture, each partner is responsible for profits, losses, and costs associated with the project. A joint venture can be formed as a separate legal entity, different from the companies owned by the partners, or can be created by voluntary agreement of the parties, without constituting a separate legal entity. The partners can provide in the joint venture agreement how to allocate the profits and losses and share control of the joint venture. The joint venture agreement also establishes administrative aspects, such as the objective and purpose of the venture, the termination date, how to allocate costs and make payments.
The advantages of a joint venture include accessing additional financial sources, sharing economic risks with the co-venturer, widening economic scope, acquiring know-how and learning new methods. The disadvantages of a joint venture include sharing the profit and having diminished control over the project.
The acquisition of a company is also known as a “buyout”
Unlike a joint venture, a company acquisition is not made for a determined period of time. Acquisitions are typically performed in order to take control and build on the acquired company’s weaknesses and strengths. As a result, the acquiring company will no longer need approval in the decision-making process from the acquired company’s shareholders. Just like with joint ventures, a company acquisition is made through a contract. After the negotiation phase, the parties sign a contract that lays out the terms and conditions of the sale.
The advantages of acquiring a company include reducing barriers to entry to a market, acquiring new capabilities and resources, accessing new experts, accessing new capital, and developing new ideas and fresh perspectives. One can also face challenges when acquiring another company, such as facing culture clashes and duplication of employees’ competence, damaging the brands of the companies and putting pressure on the suppliers.
In summary, the main key points regarding the difference between joint venture and acquisition are:
- The joint venture is a co-operation between two or more companies, while the acquisition is a purchase of a company;
- The joint venture is entered into usually for a determined period of time, while the acquisition of a company is made for an undetermined period of time;
- The partners of a joint venture share profits, losses and control of the joint venture, while the acquiring company has full control and intake of the profits and loss;
- They are both governed by contract (joint venture agreement and stock purchase agreement or asset purchase agreement).
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