So you want to joint venture (JV)?
This is a very complex area of business and books have been written on it. While it has many advantages, it is also can have some very serious disadvantages.
This blog is by no means complete and there is lots more to be said. However, we regularly come across investors that are going down the route and nothing will stop them. They also don’t know much about JV’s and have a very limited understanding. If that is you – then this blog will hopefully give you just a few of the really basic, essential fundamentals that need to be in place.
Take advice
It is always a good idea to take advice from someone who is experienced and knows that they are doing. A good solicitor will be able to help with a shareholder’s agreement. If everything goes well, you will feel like you have wasted money. However, if it all goes wrong, every word in the agreement will be scrutinised in detail and you’ll wish you spent more and had a better JV agreement in place.
The typical scenario
Quite often someone with money partners with someone with time and skill. The one with the time and skill – who happens to be the one actually spending the money – isn’t great with record keeping and can’t always explain where all the money went.
The person that puts the money is finds out, often very late, that things haven’t worked out a well as the PowerPoint presentation promised. It then all ends in tears and sometimes in court where good money is chasing money that is likely lost.
Essentials Accounts Package
We almost always insist on a JV using our Essential Accounts Package. What they are paying for is “insurance” – they happen to get great accounts as a by-product.
The insurance is that all JV partners have real time access to the bank account and expenses incurred and can see what is going on with the company. All invoices are (or should be!) linked to the underlying transaction. When they see £500 hammers and lightbulbs in the accounts, it is time to ask questions!
Property investing generally takes a little longer than expected, and costs a little more than most people budget for – and that is before we factor in builder overruns which the larger the project, the more likely and more costly they prove to be. JV projects are typically larger than average and very seldom (never actually!) do we see a JV for little £50k Baby Buy To Let’s. The large projects carry larger risks.
Having great quality, real-time accounts prepared by a 3rd party that shows what is going on goes a long way to keeping the JV partners happy and avoiding nasty surprises.
Discussions are on facts – not generalisations about what has been spent.
Three sheets of paper & lots of coffee
A pen would also be useful!
The JV partners need to agree on the three key stages. These are:
Page 1 – Flirting, dating and the honeymoon
Who is contributing what to the JV and it’s start up? Who is funding it and how? Who is finding the deal and managing the refurbishment? Who is dealing with the broker and solicitor and the surveyor (and us!) to get it over the line?
Page 2 – Who’s washing the dishes and mowing the lawn
If someone had to pop in a year later, who is doing what? Who deals with the tenants or the letting agent when there is a repair? Who is chasing payment and playing the role of credit control?
For those with money in the company – are they getting a rate of return? I think this would be fair and equitable as they could be investing elsewhere. It could be just a nominal rate but it is worth considering something.
For those running around and finding deals, managing refurbs, dealing with tenants or letting agents – what are they getting for their time? It might not be market related and maybe it is a success fee (much like a sourcing agent – you get paid only for deals completing not hours put in) but it too would be equitable and fair if they got something.
As a general rule, some financial remuneration for your contribution (time or money invested) is worth considering and everything beyond that is split in accordance with your shareholding percentages. This way resentment doesn’t build up as the years roll by.
Page 3 – What about death and divorce
No one gets out of here alive and plans may change over time due to your circumstances changing. What do you do when one partner wants out? Or wants to pay the mortgage down to reduce interest rate sensitivity risk but the other partner wants to refinance up to their eyeballs and keep going? You need a plan for this stage and it is worth agreeing it now – not leaving it till later!
More coffee is needed
You may need to revisit the above three sheets for a second look at a later stage once you have all slept on it and thought about it a bit.
If you do go to a solicitor to draw up a shareholder’s agreement, they will want to know what the key terms are that you are agreeing to.
An early JV
One of my earliest JV’s when I was 21 was with my then business partner at the time. It was a 50-50 split.
A mortgage was taken out in my name but effectively shared. He put some cash in as did I to buy it. He put some cash in most months to pay down the mortgage, I occasionally put some money in but far less frequently and smaller amounts. I kept a record in MS Excel that showed these payments.
He dealt with the letting agent. I did everything else. There was no reward for time or for money invested.
In the event of a death, the surviving partner had the right to buy the deceased partners share of the property based on an agreed formula. I didn’t want to be in business with is wife of kid so this was a key term for me.
If either partner wanted out, the agreed formula would be used and the remaining partner could stick around and buy the leaving partners 50% share. If they didn’t want to or couldn’t afford to, we agreed to sell it and move on.
We had this on a page that we each signed and it lived in the back of one of my files. I don’t think I ever saw it again. Over time the area changed and so we one day took the unanimous decision to sell it – and made a neat little profit. It worked out well.
A JV from earlier this year
Earlier this year my wife and a friend went into business together. Not a lot of advice was sought but some rudimental advice along the lines of above was provided to them – and ignored. There is definitely a lot of positivity in the honeymoon period!
Well, costs went significantly over initial estimates, agreements we entered into without the other partner being informed, the scope of the work and business changed and battle lines were drawn. In the end, for her own stability and mental health, my wife walked away. Ignoring the time, effort, late nights and sacrifices made to date – none of which can be recovered – there was also the little point about the several thousand Pounds that vanished in the process. The friendship vanished with it.
Enthusiasm is to be applauded – but ensure your foundation is secure before trying to build an empire on it!
