Joint ventures and consortiums Toolkit.

Joint ventures and consortiums Toolkit www.belfastcity.gov.uk/consortiums

Joint ventures and consortiums Toolkit Contents Introduction The difference between a joint venture and a consortium Why form a joint venture or consortium? What s right for you? Joint ventures and consortiums - advantages and disadvantages Practical steps what do I need to do? Common pitfalls Top 10 tips Are you ready to establish a joint venture or consortium? 4 4 5 5 6 8 10 11 12 Belfast City Council 3

Toolkit Joint ventures and consortiums Introduction Tendering for public sector contracts can be perceived by some to be beyond their reach, due to the size of contract, the range of products or services required, or the level of experience required. Forming consortiums or joint ventures is one way your business can increase its capacity to respond to and deliver public sector contracts. We have designed this toolkit to provide practical support to help you decide if joint ventures or consortiums are appropriate for your business and to make you aware of the steps involved. The difference between a joint venture and a consortium A joint venture (JV) is an entity formed between two or more parties to undertake economic activity together. Both parties agree to create a new entity by contributing equity, and then share in the revenues, expenses and control of the enterprise. A consortium is an association of two or more individuals, companies or organisations with the objective of participating in a common activity or pooling their resources to achieve a common goal. Within the consortium, each participant retains separate legal status and the consortium s control over each participant is generally limited to activities involving the joint endeavour, particularly the division of profits. A consortium is formed by contract. 4 Belfast City Council

Joint ventures and consortiums Toolkit Why form a joint venture or consortium? The key reasons to form a joint venture or consortium may be that it will provide your organisation with new opportunities to bid and secure contracts which would not otherwise be available to you due to your size and scale. Joint venture and consortium approaches will: 1. Allow for the sharing of resources, skills, experiences and expertise - making your tender submission more interesting to your potential clients. 2. Increase your capacity to deliver on larger tender or project opportunities. 3. Give your business the opportunity to gain new experiences within new markets. 4. Increase your geographical spread and the scope of your delivery. What s right for you? Before entering into either a joint venture or consortium agreement, all parties need to understand what they want from the relationship. Both approaches have risks and benefits: the most important thing is to take account of what your objective is in entering into the partnership and then to weigh up which avenue is more appropriate to help you manage and develop your business interests in conjunction with your partner organisations. Belfast City Council 5

Toolkit Joint ventures and consortiums Joint ventures the pros and cons To help you to consider the best option for your business, the following advantages and disadvantages have been designed to help you make the best decision for your business: Joint venture advantages Provides companies with the opportunity to gain new capacity and expertise. Enables companies to enter related businesses or new geographic markets or gain access to new technology. Provides access to greater resources - including specialised staff and technology. Shares risks with a venture partner. Enables flexibility: a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business exposure. Offers a creative way for companies to exit from non-core business. Companies can gradually separate business from the rest of the organisation and eventually, sell it to another parent company. Roughly, 80% of all joint ventures end in a sale by one partner to another. Joint venture disadvantages It takes time and effort to build the right relationships and partnering with another business can be challenging. Problems are likely to arise if: The objectives of the business are not 100% clear and communicated to everyone involved. There is an imbalance in the level of expertise, investment or assets brought into the venture by the different parties. Different culture and management styles result in poor integration and co-operation. The partners do not provide enough leadership and support in the early stages. Creating a joint venture may result in more complex tax arrangements. Success in a joint venture depends on thorough research and analysis of the objectives. Creating a joint venture can be more costly than a consortium. 6 Belfast City Council

Joint ventures and consortiums Toolkit Consortiums the pros and cons To help you to consider the best option for your business, the following advantages and disadvantages have been designed to help you make the best decision for your business: Consortium advantages Easy to establish as there are no formal procedures that must be followed. Most consortiums are formed in writing by the execution of a consortium agreement. In addition, no capital is required to create the consortium. Members of the consortium can change their contractual agreement at any time to suit changed circumstances. The consortium can be set to expire on a given date or on the occurrence of certain events without any formal requirements. The consortium is not directly subject to taxation; however the individual members are. Some of the members of a consortium may choose to be undisclosed in dealings with third parties. The cost of running a consortium is generally lower to that of a joint venture. Consortium disadvantages It is difficult for consortium members to restrict or limit its liability. Members may even become liable to third parties for the non-performance of other members of the consortium or the debts of such members in undertaking a common project. Third parties will often find it difficult to enter into contract with a non-legal entity like a consortium. Because it is a nonlegal entity funding is also difficult. Belfast City Council 7

Toolkit Joint ventures and consortiums Practical steps what do I need to do? Joint ventures The structure of the joint venture should set out the nature of your partnership. There are two main types of agreements: 1. If the joint venture is a business in its own right, it will be an incorporated joint venture. 2. A co-operative arrangement between two existing parties that keep their separate identities is called a contractual joint venture. The joint venture agreement should include: Objectives: keep it simple and try to have no more than five objectives. Funding: both parties need to specify how much funding they will put into the venture, and for how long. Assets: list any assets or employees that will be transferred throughout the duration of the joint venture. Intellectual property: state who owns any intellectual property created during the joint venture and how any financial benefits will be distributed. Roles: state who has responsibility for the processes involved during the joint venture. If you are setting up a new company, the composition of the Board e.g. Chief Executive and Chief Financial Officer - should be identified and voting rights agreed. Agreement: incorporated joint venture agreements may also need to include a shareholders agreement, covering issues such as dividend policy and how the management accounts will be produced and made available. Third parties: any consents or approvals needed from third parties should be explained in the agreement. Finances: state how any profits or losses will be divided between parties. Liabilities must also be clearly listed. Disputes: specify a mechanism by which any disputes can be resolved, such as arbitration by an agreed third party. Duration: specify how long the joint venture would last. If it is openended the agreement should state the period of notice that each party should give if they want to withdraw. Confidentiality: you may wish to consider a confidentiality or nondisclosure agreement. Principles: include a statement that is not, in itself, legally binding on the two parties. Instead it should be seen as a statement of principles enabling the parties to negotiate a final, legally definitive agreement in good faith. 8 Belfast City Council

Joint ventures and consortiums Toolkit Practical steps what do I need to do? Consortiums A consortium is more than a loose partnership of organisations working and learning together (although they will do both). It is a formal arrangement between companies working together to a defined objective. Clarity of purpose is essential and therefore attention should be given to developing a consortium agreement. Points to consider when developing a consortium written agreement: Clarity: you will need to clearly define your project and give clear and concise detail on what the consortium is being formed to do. Duration: the commencement dates and the duration of the consortium must be identified so that all parties are clear regarding start and end dates. Outputs: what are the outputs and deliverables that the project partners intend to create and what is the intended exploitation strategy for those outputs and deliverables? Roles: clearly identify the lead partner and all of the roles and responsibilities of the other parties involved. Structure: a clear management structure must be identified to include project management structures and steering groups. Finance: financial management of the project should be clearly detailed and fully described for each of the consortium members. Details should also be included in relation to the allocation of project funding and distribution of income. Responsibilities: obligations and responsibilities of each of the consortium partners should be clearly identified and each member must sign up to their role within the group. Exit: A clear exit strategy for consortium members should also be detailed that will enable members to see clearly how they may remove themselves, or their company, from the consortium. Resources: project resources that include allocation and distribution will be required including information on invoicing and claims. Personnel: addition and removal of parties to the consortium should be included, giving clear direction on the process that this will take. Privacy: confidentiality and intellectual properties should also be described. Belfast City Council 9

Toolkit Joint ventures and consortiums Common pitfalls Many joint venture and consortium approaches to tendering for public contracts are very successful. However, some of the failures can be attributed to the following: Lack of clear understanding between parties as to roles, responsibilities, titles, commitments and requirements etc. No proper safeguards in place for when things go wrong. No legal advice sought at outset in order to agree the nature of the partnership and its associated structures and management arrangements. Unwillingness to compromise on the part of each or both of the organisations. Inability to manage cultural tensions and different organisational values. Time delays caused by joint decision making can mean that businesses are slower to react to changing circumstances. Lack of appreciation of the costs that can be involved in setting up the new structure. This can also involve significant operational resources. There is a significant degree of trust required on all parts. If the new structure or one of the individual elements of it fails, it reflects badly on all parties. 10 Belfast City Council

Joint ventures and consortiums Toolkit Top 10 tips 1. Trust, openness and honesty between members are essential. Clear communication is required. 2. Choose members carefully. Look for shared values, not just skills or geographical reach. Make sure each member is financially sound through credit checks etc. 3. Be clear on the purpose and objective of the joint venture or consortium. As a business, what do you expect to gain from the relationship? 4. Be realistic about the risks and the cost involved. 5. Take time to choose the type of relationship: is a joint venture or consortium the best vehicle for your purpose? 6. Use expert help, such as legal advice, appropriately and consider the appointment of an independent advisor. 7. Clearly document what is agreed between members including delivery roles and responsibilities: who will do what, when and where? 8. Manage risks proactively and monitor performance. For example, to manage reputational risk requires openness between members, controls on who can join and robust performance monitoring. 9. Do not neglect your own organisation or businesses in favour of working on the consortium; you will need to make sure that you can spread your time across competing priorities. 10. Ensure owners or senior management are committed to the process. Belfast City Council 11

Are you ready to establish a joint venture or consortium? BCC 5303 Taking account of the risks and benefits, advantages and disadvantages and procedural requirements involved in establishing a joint venture, you need to decide whether either of these approaches is right for you and your business. In making this decision, you need to: Review your business strategy - is a joint venture or consortium approach the most appropriate method for you to achieve your business aims? Look at what your competitors are doing. Are they entering into joint ventures or consortiums? If so, has this move been beneficial to their business? Consider how much you know about your potential partner(s); are you a good fit? Are there actual changes that need to be addressed? Consider the views of your staff. They may be concerned about the impact on their job and on new working conditions. Are you and your partners clear about what you each bring to the agreement? Are you both content with this and with what is expected of you? Importance of legal advice Please note: legal advice should be sought prior to entering into a contractual arrangement. Contact the Law Society Northern Ireland on 028 9023 1614 or visit www.lawsoc-ni.org for contact details of legal practices in your area. For further information please contact: Belfast City Council, Cecil Ward Building, 4-10 Linenhall Street, Belfast, BT2 8BP. Tel: 028 9032 0202 Email: economicdevelopment@belfastcity.gov.uk tenders@belfastcity.gov.uk Web: www.belfastcity.gov.uk/economicdevelopment www.facebook.com/belfastbusinessinfo www.twitter.com/belfastcc www.belfastcity.gov.uk/consortiums