Small businesses often execute generic joint venture agreement templates without clearly understanding the applicable rules and the liability attached.
Although there are many joint venture advantages and disadvantages, applying the rules up from can greatly minimize the impact when the competition decides to protest the awarded contract, or allege that your company is somehow violating the rules. The importance of joint venture regulations can either be a company’s best friend or worst enemy.
To complicate matters even more, the Small Business Administration (SBA) recently modified and highlighted the importance of joint venture regulations. The goal is to decrease the possibility of affiliation challenges. However, there are other caveats and disadvantages that companies call fall prey to.
Importance of Joint Venture Strategy
Seeing whether you have the right joint venture strategy in place is paramount to avoiding liability and losing an awarded government contract. There more important aspects of the joint venture relationship than merely signing a templated JV document. How you strategize the entity formation, assign employees or even contemplate using incumbent employees can be very important legal issues. Government contractors should also be aware of the strict limitations on subcontracting rules that apply to forming a joint venture.
Avantages of Joint Venture Arrangements
- SBA joint venture partners can receive the “exception to affiliation” for mentor-protégé joint ventures.
- Regarding the joint venture structure, companies may or may not form a third business entity.
- Separate joint venture accounting and SBA banking requirements can avoid commingling of regular business revenues.
- Under the new rules, similarly situated businesses can escape affiliation.
- Joint ventures can now qualify as small for any government procurement so long as each JV partner qualifies individually as a small business applicable size standards.
- Companies can still maintain their separate corporate entities while pursuing government contracts.
Disadvantages of Joint Venture Agreements
- The SBA has the authority to review the terms of the joint venture partnership agreement for government procurements conducted outside of the 8(a) BD program. See Size Appeal of Drace Anderson Joint Venture, SBA No. SIZ-5531 (2014).)
- Under the new rules, the SBA has changed the JV requirements by allowing similarly situated businesses to become exempt from SBA affiliation. The actual problem becomes whether the companies can meet the “similarly situated” definition.
- Joint ventures for companies not in the 8(a) Program must still comply with 13 CFR 124.513(c)(6) and (7).
- There must be separate joint venture accounting records.
- If your company fails to meet statutory regulations, you can be subject to joint venture liability and lose the contract
- Failure to follow the SBA joint venture regulations can create an affiliation between the two companies and the JV can lose the contract.
- The SBA must approve even the slightest change to the joint venture agreement for 8(a) companies.
Challenged joint venture companies have a 40% failure rate! WHY IS THIS?
When your joint venture relationship is challenged in a bid protest, case decisions show that many companies fail the legal test, and end up losing the contract:
Not understanding the important legal difference between a teaming agreement and joint venture arrangement: FAR 9.6 allows for various relationships but the SBA regulations provide detailed requirements. Confusion on both can lead to disastrous results.
Not understanding SBA affiliation rules: Although the SBA has implemented a new set of JV rules, companies and those that are non-8(a) certified still find out that they did not have the statutory content of a joint venture agreement or did not follow the limitation in subcontracting rules.
Failure to weigh important joint venture advantages and disadvantages: A joint venture arrangement is not suited for all government contracts. Depending on the specific procurement, there could be advantages. However, you have to also look at the possibilities after contract performance. Sometimes, the disadvantages of joint ventures can outweigh the advantages. Getting the proper professional advance can save your company hundreds of thousands in the end.
Joint Venture Definition
An SBA joint venture (JV) in federal government contracting is a strategic partnership agreement or business relationship between two or more business entities seeking to engage in a specific government project.
- The governing regulations apply to small business relationships.
- It is very important to understand that a company can be small under one NAICS code but still large for another.
New regulations: Given the new SBA rules, there are some familiar advantages of joint venture relationships. Nevertheless, companies should still be aware of astonishing disadvantages of forming the JV strategic alliance.
Making sure that your JV models comply with the SBA regulations are essential. Learning how to navigate joint venture advantages and disadvantages can be a tremendous incentive to maximize company revenues.
Heavy SBA scrutiny: In federal contracting, companies that fall under SBA small business programs are subject to great scrutiny and regulations. Exposure usually surfaces when there is a small business size protest. However, when formed correctly, contractors can experience great success and can even increase business revenues. Companies deciding to engage in a joint venture agreement should consider the advantages and disadvantages before moving forward.
New SBA joint venture regulations can be tricky: When deciding to enter a JV relationship, always take a hard look at the new rules. Businesses should determine how the new rules will impact current and future joint venture relationships.
- Although statutorily allowed, considering the details and legal twists to the rules can play an important part on your business development strategies and how you go about getting government contracts.
Joint Venture affiliation still possible: Although the new SBA joint venture regulations reduce the chances of the SBA finding affiliation in a joint venture structure, failure to follow the expressed statutory requirements can still lead to a finding of affiliation. For example, a mere diversion from the regulations can lead to affiliation. Also, if there is a violation of the limitation on subcontracting rules, the JV can end up losing the contract.
Is your joint venture partnership agreement compliant?
Given the new SBA joint venture regulations, small businesses must make sure that they avoid the mistake of copying old SBA joint venture templates from online. There are too many pros and cons of joint ventures to make this frequent mistake. The best way to assess your contents is to have a legal professional to do a line by line comparison of your JV agreement contents.
For help with your joint venture structure and to avoid liability when forming a joint venture partnership, call Watson’s SBA lawyers. at 1-866-601-5518.