The Joint Venture Conundrum

A problem shared is a problem halved, or so the maxim has it. And to be fair, there’s plenty of truth in it. Sharing our worries or woes with a friend or partner can miraculously diminish the scale of our challenges and make the world seem a much brighter place. True, we may not have solved anything, but in sharing the pain, we get the impression we’ve somehow shared the burden too.

In business, the mantra holds equally true. The challenges of commercial life, particularly for the entrepreneur, can be daunting, and in many instances, it can be a case of sink or swim. Survival, in financial terms, rests entirely on one pair of shoulders. And discussing these challenges with others can have multiple benefits. We can let off steam and get another person’s perspective.

Plus, we can gain greater clarity by hearing ourselves verbalise our problems to an audience.

But of course, while having a conversation can be cathartic, the problems and challenges stay firmly rooted in our own backyard. No amount of tea and sympathy is going to shift the workload, no matter how understanding or well-intentioned the audience. Which is why, not unreasonably, people have a very natural inclination to want more than just a friendly ear to sound off to. No, what makes a real-world difference is having a real-life business partner. Someone with an equal stake in the venture’s outcome, with whom every burden can be equally shared and every success celebrated.

To some extent, the mere presence of a business partner, whatever their pedigree, can be a real weight off your mind. Suddenly it’s not all down to you; it’s also down to them. You can discuss things, chew the fat, mull over problems together – and, of course, get another, often very different perspective on the world. After all, you don’t have the monopoly on good ideas, and two heads are often better than one. Better still, if your business partner has complementary talents to your own, you can really get motoring. You may even become greater than the sum of your collective parts. Now wouldn’t that be something? And often, working with someone else can also be a lot more fun.

Not surprisingly, then, the prospect of entering into a joint venture arrangement can look enticingly attractive for many people, particularly when they’re faced with a giant leap out of their comfort zone. And property investment is no exception, especially when it comes to development. As someone who has trained and worked with many new and experienced developers over the last 40 or so years, I can vouch that many see joint venture partnerships as their best way of moving forward.

And just like many other entrepreneurial enterprises, property development can be something of a lonely old business. Sure, you’ll be working with a team of people who will each perform vital roles relating to design, planning, finance, and construction.

But ultimately, the buck stops with you. You’ll have an endless supply of technical knowledge and advice, but the bigger business decisions will be entirely yours. And that’s where having a business partner can really sweeten the deal.

Another significant advantage of a JV partnership is that it becomes a catalyst for action. Left to your own devices, you might dither, delay, and generally procrastinate. Depending on your proclivities, you might spend weeks designing your business cards yet never quite get round to the much scarier task of handing them out. And no one will call you out on it, get annoyed with you, or generally tell you off because you’re a sole agent. You’re the only one who will know exactly how naughty you’ve been. But throw a business partner into the mix, and suddenly there’s some accountability. If you don’t pull your weight, you’ll worry you’ll be viewed as the weakest link, and that’s not a good look. With your business partner looking on, you’ll be highly motivated to pull your finger out and take action. And, of course, the same applies to your partner, so guess what; the business moves forward more quickly as a result.

If joint ventures are a great idea in principle, how do they stack up in reality? The first thing to say is that JVs can go both ways. I’ve seen some partnerships achieve some amazing things, much more than the individuals would have achieved on their own. But on the flip side, problematic JVs remain the most common reason for failed business ventures in the development world. So, I thought that in this article, I’d share some thoughts on why that might be, and perhaps more usefully, what you need to think about when considering a joint venture to make sure that you have a fighting chance of creating a partnership forged with steel rather than blancmange. Let me break down the five most significant challenges that I see with joint ventures and give you some potential solutions to each:

  1. Stranger danger

The most common problem I encounter with JVs is when the protagonists don’t know each other very well. Many have only recently met, yet because they have a common goal that’s very exciting, it sounds like the best idea in the world to team up. Usually, at least one of them secretly worries that they might not cut it on their own, so joining forces would be a massive relief. Then, buoyed by the joys of collaboration, they embark on a development journey together. It’s only down the road that they find that they have different values, expectations, priorities, and, in some cases, different levels of trustworthiness, honesty, and integrity.

The solution: Team up with someone you know well, preferably over several years. Ideally, you want them to be in your social circle; that way, they’ll be less likely to leave a mess on their own doorstep. If your prospective partner doesn’t tick that box, make sure you at least do some solid due diligence on them. Look at their corporate history on Companies House, if they have one, and google them thoroughly. Do they have any other joint ventures or business relationships? Do they have any credit problems? Check their credit history to find out. Also, make sure you’ve visited them at home and met their significant other; you can get a telling insight into people and their circumstances when you’re in their house and talking to their nearest and dearest. Finally, trust your gut. Your subconscious is very adept at telling you whether someone is trustworthy or if there’s something that doesn’t quite feel right. Don’t let rose-tinted glasses mask what your gut is telling you.

  1. Unequal rights

Another issue you need to consider is who will be doing the work. Does a 50/50 share of the profits equate to an equal share of the workload? Or is one of you bringing something else to the party, such as finance, contacts, resources, or expertise? As you can imagine, a business partner who swings the lead is the epitome of unfairness and will be a constant source of resentment and quiet seething on your part. Also, different people have different views on what constitutes ‘collaboration’, and you’ll want to ensure you and your partner are on the same page. You won’t want your partner to be a loose cannon, unilaterally agreeing to things without your buy-in.

A perfectly acceptable relationship is where one party supplies either the source property or provides the capital. The other party then oversees the development, which necessarily involves putting in more hours.

The solution: Make sure you set out in writing at the outset what each of you is responsible for and the work that you will be doing. This should form part of a joint venture agreement you should both sign. You can also include the time each of you is willing to commit to the project. While this may be difficult to enforce, it would be good to know at the outset if your partner expects to work fewer hours than you. If one of you is providing an asset such as property or capital, make sure that this is covered and protected within the agreement.

  1. Counting the cost

One of the most significant considerations for any joint venture is its cost to you as an individual. You can see all the shiny upsides, but assuming it’s an equal partnership with one other person, you’re going to be giving away half your profit. Since small-scale developments typically return a margin of between £100k and £500k, that’s quite a fee you’ll be paying for the privilege of having someone else come on board.

The solution: Firstly, do the maths. Work out how much profit you’d be giving up, and then ask yourself what you’re getting in return and whether it’s worth it. The bottom line for many people involves asking themselves whether they believe they’ll succeed on their own. This is where you’ll need to be honest with yourself. If you think you can, then a JV partnership will mean giving away half your income, so you’ll want to be very sure that you’re getting value from your partner that’s at least equal to that amount. But if you think you can’t, then a JV partnership could make the difference between having some profit or none at all.

  1. The expertise trap

What about joint venturing with someone in the industry, such as an architect, project manager, or, better still, a contractor? Surely having a contractor as a partner will guarantee you the best rates, plus you’ll be working with someone who knows their way around the industry? The answer, unfortunately, is that joint venturing with a contractor will almost certainly be a bad idea. The main reason is that your new partner will have two profit sources from the deal while you only have one. Will you run a tender to ensure their firm’s pricing is competitive or just go with what they quote? That’s assuming that other contractors will bother quoting if they know they’re unlikely to win the business. And even if their pricing is competitive, what happens if your partner later informs you that they need to charge some additional costs due to workarounds, materials price hikes, and who knows what else? Do you just accept it? If so, your partner has simply moved profit from your side of the deal to theirs, and you lose out. Or what if they do a shoddy job or suddenly take their build team off your project and onto someone else’s because an emergency has cropped up in their business? Surely, you’re not going to stand for that? But hold on a moment; you only have a 50% share of the vote… Hopefully, you can see why this arrangement carries significant risk for you as the developer.

The solution: It’s usually far better to hire a contractor and employ a decent project manager to oversee their work; plus, it will work out much cheaper as you’re not giving away half of your margin. The same goes for any other professional discipline you could otherwise hire in. Always ensure that the value you get from your partner is greater than the cost of giving them half your profits.

  1. The joint and several issue

Another area of potential inequality is your respective financial positions. As a developer, you’ll have to give a personal guarantee to any commercial lender, and this will be a joint and several arrangement with your business partner. It means that in the unlikely event that the lender needs to call on the guarantee, they could claim the entire amount from either one of you individually, irrespective of the fact that you’re 50/50 partners. If you have more liquid assets than your partner, you may find that you’ll have to settle 100% of the debt and then try and reclaim half of it from your business partner, who may or may not be able to pay it.

In an extreme example, should your business partner head for Mexico, leaving you in the lurch, you’ll be on the hook for the PG no matter how illiquid your assets. It’s then entirely up to you whether you try and hunt down your errant business partner and try and persuade them to pay you back their share.

The solution: This is mainly an awareness issue – you simply need to understand what you’re signing up to. Finding out whether your assets are more liquid or substantial than your business partner’s will be evident from your respective net asset statements, which you’ll have to provide to the lender. Although it’s very rare for personal guarantees to be called on, you should still know where you’re likely to stand, particularly if you spot a suitcase and a sombrero in your partner’s office.

One further consideration is to think about what happens if your business partner encounters a problem down the line that affects their ability to work on your project? Perhaps an unexpected life event means they must take time out, either temporarily or permanently. They may be the best business partner in the world, but if they can’t work, then it’s all down to you. Clearly, they’d presumably do the same for you, so from a business perspective, having this extra cover is an advantage. Just be aware that it’s a possibility.

For those of you pondering a potential JV, hopefully, this has given you a few things to reflect on. The best part about joint venturing, particularly for someone new to property development, is that for some people, it can make the difference between getting a project off the ground or staying rooted to the runway. The motivation, accountability, and fun that can come from two like-minded people working together can be a hugely powerful force and one that can catapult your business forward.

What can aid a strong partnership? Well, always ensure that you have a written agreement that sets out all of your arrangement’s parameters, including who is responsible for doing what and the resources and capital each of you is contributing. Set goals for your business and create a workable business plan. Also, ensure that you communicate well and are always open and honest with each other since trust is the glue that holds business relationships together.

As the co-founder of a property development training business, I always tell our students to shy away from joint ventures. That way, if they form one, I know they’ll have done a lot of due diligence first and kicked the tyres pretty hard. The truth is that joint venture partnerships can produce amazing results, but only when the right people come together on the right project. Get those two things nailed, and you could well be on to a winner. Just be sure to do your due diligence first.