Construction Joint Ventures: Partner in Success (If Done Right)
The construction industry has long been described as one of the most competitive industries to operate within which can work against a contractor in that the high level of competition leads to a willingness to take on more risk. Not only is the industry itself inherently risky, but it has now seen an influx of foreign funds and private equity buyouts that continue to make profitability and even staying in business more difficult for construction business owners.
One option for contractors to address these industry challenges is to enter into a joint venture. A joint venture allows the contractor to partner with another construction company that can benefit both sides by: sharing the risk, combining labor forces, expanding into new areas, and creating the ability to bid on larger jobs. While forming a joint venture has many upsides, there are still several factors to consider before contractors decide to partner up:
- Find the right fit. Most joint ventures are formed for the purpose of bidding on one specific job. As such, your reasons for choosing a joint venture partner should be logical and strategic. These reasons may include: an expertise in an area that your Company does not normally perform; abundance of labor force availability to perform the work; a physical presence in the desired job location; previous experience with the job owner, etc. Why you are choosing a specific joint venture partner and what each brings to the table should be clear.
- Create an airtight agreement. A joint venture is a separate, legally formed entity. Creating a proper and detailed joint venture agreement is imperative for a successful partnership. Key areas to address:
- Ownership, voting rights and allocation of profit and losses
- Capital commitments from each partner
- Internal management, administrative and finance teams to service the joint venture
- How outside professional service firms will be chosen – banking, bonding, insurance and accounting
- Any and all contingencies: partner bankruptcy, partner inability to make capital contributions, partner voluntary exit from the joint venture, disagreements between the partners, legal matters brought against the joint venture or a specific partner, etc.
- Know your role. A joint venture is a partnership, both formally and in every day dealings. Many business owners may not be used to sharing the decision making, being held accountable and/or having job performance or metrics questioned. How these items will be handled, who will be responsible and how often they are addressed needs to be clear and agreed upon up front.
- Secure financing. Forming a joint venture typically allows the contractors to bid on larger jobs that may have been out of their scope had they gone at it alone. As such, how the entity and its operations will be funded is an important piece to solidify to ensure that both partners get their desired results. This should include obtaining outside financing from a bank, any capital to be contributed by the partners, and how each source of funds should be utilized.
- Have an exit plan. When forming a new partnership, one of the last things owners want to discuss is how it will end. However, the process of unwinding a joint venture is not dictated by law and can get messy if the partners are not clear on the steps to take. This should include final expenses to be paid and covered by the joint venture (accounting, taxes, legal), how long it must legally stay open for insurance purposes, and also final liquidation and distribution procedures.
Although forming a joint venture can provide contractors with numerous opportunities to expand their business and share in the risk, there are many issues and aspects that should be addressed to set the path for a smooth and successful partnership. If you are contemplating forming a joint venture, keep the above key concepts in mind and contact your advisor at Sax LLP for assistance and insight.