Joint Venture Agreements
When investing, particularly in the property business, two or more bank accounts, brain power and expertise can be better than one, and because of this the Joint Venture Partnership was born into being.
A Joint Venture Agreement is an arrangement where two parties develop a new project to their mutual benefit. It usually involves a sharing of resources, which might include capital, personnel, equipment, facilities, skill set or intellectual property or a combination of these.
A Joint Venture Agreement provides mutual benefit, which can take many different forms. An example typical in the property industry is where one person has a set of expertise and is not able or willing to invest financially into a project, who will then seek to Joint Venture with another person who may have the financial capability but lacks the skill set to make a project work.
There is always an element of risk in most Joint Venture Agreements in which both parties share in the risk, such as the financial investment. Should the venture not become profitable, both parties can walk away from the deal losing less than if one person independently invests in the venture. Joint Ventures provide a person with a means to exit from a joint business or to enter into a new business with less of a financial commitment than if they were to do it on their own.
Forming a successful Joint Venture requires both time and effort. Both parties can often come to the potential venture with different goals and ideas. Each party may be very different in their approach to business and the integration of the two ‘cultures’ may be tricky or take a period of time. A further problem may be that one or both parties don’t commit enough time or resources to achieve a successful outcome for the venture.
There is absolutely no point in creating a Joint Venture if you do not need to! Do the numbers, it may be cheaper to pay for the skills or money, that you need, than to split your profits.
It is not always prudent to Joint Venture on your first project, for the simple reason that your property model needs to be proven to work and needs to make a profit, before you involve anyone else (especially their money) in your business. Joint Ventures work best when the second party brings something to the already working model that can make it work (in the words of the fabulous Hugh Hilton) better, faster and more efficiently.
As the Delphic maxims inscribed in the pronaos of the Temple of Apollo at Delphi says:
Know Thyself’! If you are not a team player, if you don’t like to take advice or be told what to do, or hate running things past others and give regular updates… then save yourself a lot of heartache and don’t go into a partnership.
There are potentially endless types of Joint Venture Agreements, however, to keep it simple the two most common ones and in which most agreements can be categorized into are:
- Profit Share Agreements and 2) Fixed Interest Agreements.
Profit Share Joint Venture Agreements
This is possibly the most common type of Joint Venture Agreement found in the property industry. A project is brought into fruition, a profit is achieved and the profits are then shared amongst the shareholders in pre-agreed share percentages.
Fixed Interest Joint Venture Agreements
This often occurs when one party brings the money to the venture and the other party provides the skill and effort required for the success of the business. Once the project is up and running, regardless of the profit margin, the partner providing the money may receive a fixed rate of interest on their investment, rather than a profit percentage split.
- Always have clear exit strategies written down and agreed, for every scenario you can imagine.
- Discuss and agree on everything you can think up: what circumstances allow for a property sale?; when will you re-finance?; how much money is being left in the deal?; are you shareholders or directors?; is one party going to be bought out at some point – if so, then what circumstances will allow for this?; how long is your Joint Venture agreed for?; what do you do if one party dies?; what do you do if there is a disagreement?
- Get to know your partner well and decide exactly who will be doing what. Also, decide if you will have an arbitrator each, during disputes or not. How transparent is the business willing to be? How transparent are each party prepared to be with one another?
- Have everything in writing and leave no stone unturned no matter how uncomfortable; people forget what they said and promised when they are threatened or compromised.
- Get your agreement drawn up in minute detail by a solicitor who has experience in property and property law.
- Build your relationships before you need them. Be prepared well in advance and have those conversations and create those networks before you find the deals you need them for. It will mean a long and trustworthy partnership for all involved.
And finally, have fun!
“Business is a great adventure and adventures shared are always better especially when there are profits to be enjoyed.”- Kirstie Shapiro