If you’re setting up your first joint venture under the SBA’s rules, you may be tempted to download the SBA’s template joint venture agreement and use it as-is.
But, as of the date of this post, the SBA’s template joint venture agreement is outdated–and it also has some other quirks and potential problems you should know about. If you’re planning to use the SBA’s joint venture template, read this first.
If you’ve been following my posts on SmallGovCon (and I hope you have!), you’ll recall that I have recently written about substantive changes the SBA made to the joint venture regulations in November 2020. For mentor-protégé joint ventures attempting to comply with the regulations under 13 C.F.R. 125.8, I believe that two of these changes–to the mandatory JV requirements governing bank accounts and recordkeeping, respectively–are substantive changes sufficiently at odds with the “old,” pre-November regulations such that a joint venture agreement will be non-compliant unless it includes these updates. As of the date of this post, these changes are not included in the SBA’s template.
The November 2020 regulations also made some other changes, not only to the small business joint venture regulations under 13 C.F.R. 125.8, but the separate joint venture regulations for the for 8(a), SDVOSB/VOSB, HUBZone and EDWOSB/WOSB programs. For instance, the SBA’s new regulations eliminate the term “Project Manager” in favor of the more-inclusive “Responsible Manager.” These other changes may not be significant enough to render a joint venture non-compliant if it doesn’t enact them–but why take any risks?
Included, but Non-Required, Provisions
Beyond the potential problems posed by the November 2020 rules, the SBA’s joint venture template doesn’t specify when a particular item is required by the regulation and when it is not. And the template is chock-full of provisions that sound like they’re probably required by law, but actually aren’t. Here are a few that caught my eye:
- Ownership Split. The SBA’s joint venture template includes a 51%/49% ownership split in favor of the Managing Venturer. And, in my experience, that’s how it’s done in the vast majority of “SBA-style” joint ventures. But, assuming we’re talking about a two-party joint venture in which only one party has the “right” qualification, such as small business size or 8(a) status, (and in the interest of keeping this post relatively simple, I’m not going to get into multi-party JVs) 51% is the floor for the Managing Venturer’s ownership and 49% is the ceiling for the non-Managing Venturer’s ownership. It’s perfectly fine for a joint venture to adopt a 60%/40% split, or 70%/30%, and so on. But you wouldn’t know that from the template.
- Losses. The joint venture agreement says that profits and losses will be shared in proportion to the venturers’ performance of work. This, too, is typical, but the regulations only require that profits be split proportionate with workshare. The venturers are free to adopt another formula for the split of any losses.
- Source of Labor. The template joint venture agreement says that “the joint venture will allow for a blended pool of labor employees of both parties,” and that the Managing Venturer “will have the first right to refuse employment during the performance phase of the Contract.” Contrast this with the regulatory requirement, which is merely that the joint venture agreement contain a provision “specifying the responsibilities of the parties with regards to . . . source of labor.” Nothing requires a joint venture agreement to adopt “blended pools” or a right of first refusal for the Managing Venturer (which, if I’m the non-Managing Venturer, I would be pretty darn wary about, because it sounds like the Managing Venturer could use my qualifications to help win a contract, then exercise its first-refusal right to perform 100% of the contract).
- Negotiation of the Contract. The template joint venture agreement says that the Project Manager shall be responsible for negotiating the contract with the agency. But the regulations just state that the joint venture agreement must contain a provision “specifying the responsibilities of the parties with respect to . . . negotiation of the contract.” That’s it–nothing more is required; the parties are free to work out the details on their own. I think it’s wise (and in keeping with the Managing Venturer’s overall role) to have the Managing Venturer lead negotiations. But who the heck says it has to be the Project Manager doing so on behalf of the Managing Venturer? Nobody, that’s who!
- Mediation. The template joint venture agreement says that if the joint venturers have a dispute, they will submit it to mediation. (Although the so-called “mediation” appears to be binding, which would mean it is actually arbitration). The SBA’s joint venture regulations do not require the parties to agree to mediation (or arbitration). This provision is entirely optional.
Other Potentially Confusing/Problematic Provisions
I have also noticed a few provisions in the template joint venture agreement that may confuse venturers:
- Project Manager. The template indicates that the Project Manager (now called the Responsible Manager under the post-November rules) is an employee of the Managing Venturer. But the rules also allow the PM to be a contingent hire of the Managing Venturer, something that isn’t evident from the template.
- Bank Account. The template does not specify who must be named as signatories on the joint venture’s bank account, but the SBA’s regulations state that the account “must require the signature or consent of all parties to the joint venture for any payments made by the joint venture to its members for services performed.”
- Resources. The template says that major equipment, facilities and other resources “will be furnished as detailed in Appendix A,” but does not provide an Appendix A! I suspect some joint venturers will simply forget that they need to create an Appendix A and populate it with this information, including a “detailed schedule of cost or value, where practical.” The template also does not indicate that there are other options for meeting this requirement if the underlying contract is an IDIQ.
- Contract Performance. The regulations require that a joint venture agreement contain a provision specifying each party’s responsibilities “with regard to . . . contract performance.” To my eye, the template does not seem to include a provision satisfying this requirement. It does have a provision addressing contract oversight, but that’s only one piece of performance. (A “Contract Oversight” paragraph, meanwhile, isn’t required by the regulations).
A Few Final Thoughts
I think it’s great that the SBA has provided the public with a starting point for a joint venture agreement. But I am concerned that the now-outdated template may lull small businesses into a false sense of security.
No matter what your starting point–even an SBA template–there is absolutely no substitute for carefully crosswalking your joint venture agreement against the appropriate, current, SBA regulation. That’s the only 100% sure way to know that you’re in compliance–and avoid adopting terms that might appear mandatory, but are anything but.
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