Small to midsize construction companies face challenges that larger firms often do not encounter. For example, cash flow and staffing are two major challenges.
Larger firms can more easily hire contractors, managers and staff, primarily because they have the cash flow to do it along with a steady stream of new business to keep the new employees busy and profitable. Smaller firms may need the help but are unable to afford staff or even one extra employee. Additionally, small firms face the challenge of making most of the major business decisions on their own. Conversely, large firms can bounce ideas around among their management team and staff.
To address this, smaller construction firms often turn to partnerships and collaborative agreements. This is a way to maintain or grow their business or to solve a number of other challenges, including financial concerns. While the old adage, “strength in numbers,” often holds true, contractors seeking to build strength through partnerships and business collaborations must be aware of the benefits and risks associated with each.
Separately, regardless of how successful an alliance is, all good things must come to an end. Most often, an alliance ends because a partner retires, a project ends or creative differences develop. It is important that there is a strategy in place for transitioning out of the business or the relationship with a partner or collaborator.
For many contractors, a business partnership sounds very appealing. Aligning with someone who has a complementary skill set and a like-minded vision may be beneficial from a financial, intellectual and creative standpoint. The benefits of a union include the ability to draw on a wider pool of administrative and business resources; construction knowledge; individual overhead and cost reduction; reputation and credibility; increased efficiency; and the ability to pool connections, which can result in the development of new leads.
While the benefits of a partnership may seem quite clear, the pitfalls of such an arrangement are numerous and often overlooked. The most common mistake made by contractors entering into a partnership is the lack of a formal and comprehensive written partnership agreement. The majority of disputes that arise out of partnerships are because they have failed to create a formal agreement or because the agreement fails to address potential points of contention between all parties involved.
Prior to forming an official partnership, it is critical that all the parties involved sit down to discuss their expectations of each other as well as their specific goals. A key factor at this stage of the partnership is transparency. Each contractor should have a good understanding of what each individual or company is bringing to the table. Transparency is essential to creating a good partnership and a strong business relationship.
Many contractors prefer to collaborate with their colleagues instead of joining forces in a partnership. Collaboration can involve a limited number of projects or extend to individual clients and beyond. As with partnerships, any collaboration with a colleague or firm must be clearly detailed in writing. Obviously, when discussing collaborative efforts, there will be numerous meetings between the parties involved. During these initial meetings, the parties should state their expectations and limitations. Ultimately, a written agreement should be prepared so that each party fully understands rights, obligations and limitations.
Regardless of the size or impact of the collaborative effort, having a written agreement is paramount for a successful relationship. While concerns over financial liabilities may not be an issue in a collaborative approach, damage to one’s reputation and image, as well as general liability is always a concern. Therefore, it is critical to establish each party’s workload and the amount of credit that each should expect to take for the project.
Transitions – Exit Strategies
Most partnerships and/or collaborations, regardless of how successful, eventually come to an end. An often-overlooked pitfall of a partnership or collaboration is entering into one without having discussed an exit strategy. Most contractors enter into a partnership expecting nothing but the best from their partner. There is nothing wrong with that so long as both parties know that there is a possibility that the relationship could go horribly wrong.
Think of an exit strategy as the equivalent of a prenuptial agreement in a marriage. Having a pre-determined exit strategy helps keep the business on track, maintains clients and avoids implosion and ruination of the business.
Transitioning out of the partnership or collaboration is relatively less complicated, so long as the contract between the parties addresses issues of company ownership, client management, financial issues and related items.
For example, assume that two contractors entered into a partnership and that their partnership agreement clearly and explicitly discussed what would happen if one partner wanted to disassociate himself with the partnership. In other words, the agreement addressed what monies would be paid out, how existing projects and clients would be handled, what information would be provided to those clients and an explanation as to what the retreating partner would be liable for.
By addressing the dissolution of the partnership at the time of its formation, when one partner leaves, the plan is already in place for his departure. It’s simply a matter of following the rules laid out in the agreement.
Of course, when money is involved it’s never as simple. One partner will always believe that he is entitled to more money than the other. While having a pre-negotiated exit strategy can simplify the departure of one partner, there are always going to be snags. That is why it is important to have an attorney prepare an exit strategy or dissolution agreement. Even if the partners decide to create their own partnership agreement or collaboration contract, it is well worth having an attorney draft the dissolution provisions. It can save a tremendous amount of money in attorney’s fees in the long run.
Transitions – Closing a Business
While a transition can refer to the dissolution of a partnership or collaboration, it traditionally refers to the sale of one’s business. Unfortunately, most business owners or partners have no idea how to properly transition out of their business, sell it and its assets to an interested buyer, and leave the business behind having made a profit. That is why statistically more businesses close rather than being purchased or assimilated into another firm.
Transitioning out of a business shares several common themes and similarities to the dissolution of a partnership, just on a much grander scale. When selling a functional business, it is imperative that the owners or partners employ financial advisors, attorneys and certified public accountants to assist them with the transition. The financial pitfalls alone can lead to the ruination of the businesses’ owners. It is not uncommon for a successful design business with a significant amount of assets to end up in the red as the result of a failed transition.
Partnerships and collaborative efforts absolutely have positive benefits for small to midsize construction firms. However, it is important to focus on all of the variables that could go wrong when deciding to form such a relationship. Certainly hope for the best, but prepare for the worst in advance. If the partner or collaborator is not interested in having a meaningful discussion about the potential pitfalls or refuses to sign a partnership agreement or discuss an exit strategy, think twice before entering into such a relationship. Through proper preparation and planning, contractors can build meaningful and successful partnerships and collaborative business relationships. The key to success is addressing how to deal with problems before they arise.