Due Diligence for Joint Ventures: Where to Begin

Transcript

Speaker 2 (00:00.108)
It's really a discussion or maybe even a series of discussions, interactions really, that allow you to understand the language people are using, the way they're approaching and what they want in a scenario. For you then to assess whether you actually want to carry on that your alignment sounds good, you resonate. Remember the difference between resonance and dissonance, where resonance is two people coming together and the value of that expands.

in dissonance where you meet people, you're coming together, but you're feeling that the outcome is going to be painful. It's not going to be enjoyable. And maybe even there's a lack of trust there.

Speaker 2 (00:43.662)
Within this one, we could give it a good go, especially as I say, it's the most popular question we get, particularly when people are lending, collaborating, lending and learning, or JVing and whatever the definition of JV we want to give. And that's a subject also in itself. So let's just talk about that.

And we've tried to make it kind of simple for people to remember because there's three fundamental P's to remember. that's the people, the project, and the paperwork.

It's an way to remember it, just to give it a frame to hang it on. So why don't we deal with the people first and just talk about what would be the process if you want to get to understand where the risks are in dealing with individuals and how you can help mitigate that. The first one is in previous episodes.

In joint ventures, we talk about the Waters formula. And you've heard me talk about that before, Chris, the win-win, the alignment of values, track record, exit strategy, relationships and structure. So we won't able to do all of that, but there's a little bit of that in this discussion of risk because structure and alignment of values are two really important parts of this. So certainly in my view, when it comes to dealing with people, don't do any diligence at all.

unless you resonate with their values. So spend some time talking to people, talking about what you want, talking about what they want, and see if you share values. And I let the interview, I call it an interview, but it's really a discussion, or maybe even a series of discussions, interactions really, that allow you to understand the language people are using, the way they're approaching what they want in a scenario.

Speaker 2 (02:32.844)
and the clarity over which they communicate that. For you then to assess whether you actually want to carry on that your alignment sounds good, you resonate. Remember the difference between resonance and dissonance, where resonance is two people coming together and the value of that expands, the relationship expands the value. And dissonance where you meet people, you're coming together, but you're feeling that the outcome is going to be painful. It's not going to be enjoyable.

and maybe even there's a lack of trust there. So the first stage is always to get a sense of how you feel and every wealth dynamic is going to feel that differently. The creators are really going to feel it from the gut, you know, might be relevant for those who are blazed to take it to another level, which is almost always to connect with others and see what they think, you know, and get that justification elsewhere. But we'll talk about that as we go through how you do due diligence on people. Would you like to know how I do it?

Yeah, do we have a kind of checklist we can run through?

Yeah, sure. We can obviously produce this as a checklist, but the first thing I want to do, particularly if there's some kind of financial discussion going on, I want to see what's the financial footprint somebody's already got in life. You want to make sure there are no skeletons in the cupboard, so to speak. And I'm very plain and direct with people on due diligence and say, I'm going to want a number of to make. I've already passed the resonance test with you, Chris.

But I need to know a few more things in order to get real sense of comfort around what you've done in your financial life historically, particularly as we're entering into a financial discussion. And one of those is assets and liabilities. I want someone to create or share a spreadsheet of their assets and liabilities. And I want to do that early on. And the reason why I want to do that early on is I'm going to check it out later. I'm going to test it out later and see there's a consistency in what they say and what they do.

Speaker 2 (04:34.552)
So get the assets and liabilities early on and have them produce it in a format that you can then check. The next thing then is a credit search. You're going to check out OXPERIENT. We have one in the office where we can, with their permission of course, or they can provide one, but usually we ask their permission. We run a credit check and that will tell us how they're viewed in the wider community in terms of their...

accessibility in and how the intermediary market would see them. So an experience check will give you an outcome. Now I said we were going to do some consistent checking here. So in the assets and liabilities, we'll see that people will confirm what properties they own and we want the addresses. Guess what we do then?

and registry.

Check out the property, check out if they own them. How do they own them? Do they own them as joint tenants, tenants in common? Is it in their name, their wife's name, or they're hiding something, or is everything transparent about board? The next thing we'll do is go to company's house to see if they've got any directorships. So you can search either by company name or an individual name, and you can look at what breadcrumb trail they've left with companies, whether the companies have all been trading well, their accounts are up to date.

whether any companies gone into liquidation, whether any companies have gone bankrupt, not that any of these on their own or individual things that would put you off, but you want to know. And by asking people, which again, I tend to do, has anything ever gone wrong? Everybody's done something that's gone wrong. I've done some things that have gone wrong in business and there'll be evidence of that. So, you know, I'll talk about that and I don't shy away from that at all because it's evidence that you're pragmatic. You make a mistake and you learn from that mistake. So you want to look at that.

Speaker 2 (06:21.154)
and you look at their website for their current company, trust pilot reviews, you know, get a feeling for not just what they're doing now, but Companies House will give you a sense of what they've done in the past. Also on Companies House, Chris, there's a record of all charges. I don't mean charges as in legal charges in terms of, you know, what have they done in terms of being involved with the police, but what are the registered charges, which are financial charges, mortgage charges, charges, something called the debenture.

The venture is where somebody gives the security of the assets in their company in exchange for a loan. And you want to know that, particularly if they're saying the company is the security on which you might be relying on in the future. You want to see, well, who else is ahead of you in that charge. Now, what no charge will ever show you is personal guarantees. You'll hear a lot about personal guarantees in the world of mortgage lending. know, companies will...

Major institutional lenders will want to do a legal charge, a mortgage. They'll want to take a debenture on a company and they'll also want a personal guarantee. Now, banks have got the power to enforce that, individuals rarely do, but a personal guarantee is not registered anywhere. You cannot find a personal guarantee. So never rely on a personal guarantee because you don't know how many times they've promised it. But I always ask, any PGs? It's the other word for personal guarantees. Do you have any PGs?

and ask them to tell me. Now can't check it, but if they tell you, you can always ask. I see you've got a debenture on company ABC. Is there a personal guarantee? yeah, there is. You know if somebody is not telling the truth when something pops out as a result of a bit of due diligence. The next thing to do if all is going well is look at social media. Look at LinkedIn, look at Facebook, look at any way you can. Google their name. See if there's anything that comes up. And if it's all looking good in Rosie,

then that's giving you good signs. And finally, ask for references and testimonials. Now, of course, someone might give you a reference from their best friend's cousin, fair enough, but you've got to be able to be diligent and say, well, what was the connection between you and them? If it's a loan you're making from a previous lender and you want more than one, and then you want to have a actual conversation with those. So.

Speaker 2 (08:46.988)
You can see that's pretty robust. You're doing all those things. You should be flushing out anything that will cause you any concern. And that's not easy to do. Unfortunately for me, because we do a lot of this, I've got a team member who does that and she enjoys doing it. And, you know, she's a ferret when it comes to trying to find things, particularly on Google, where, you know, something hasn't been disclosed. And then, you know, if there's a reasonable explanation for disclosure for all forgetting, let's say,

I can live with that, but if anybody lies, it's an instant no-go. If you detect a lie, you simply, out of resonance, close down, inquire even further. Does that give you a of a helping hand on what you might do around the due diligence on people?

So moving on then to the next P, which is the project.

Well, this is as broad as it's long because every project is different. But in a sense, what you're trying to assess is where's the risk in the project. So of course, in a piece of property, you always want a valuation. You want an accurate up-to-date valuation that tells you what the professional valuation of the property is. You want to know if it's a project that, say, over a year, you want to know, well, is there any planning risk? Try and avoid planning risk because you don't want to be involved in that.

If it's permitted development, want to know whether this qualifies for permitted development, which means being able to convert something into residential, but without having to seek the formality of planning. You've then got what's the future projected value of the project when it's done, sometimes called the GDV or gross development value. Is that realistic? Who's provided the costings for that? What are the bill costs? What's the estimates of that? Where's the funding coming from? What is the...

Speaker 2 (10:35.512)
contingency that they put in, how much skin have they got in the game individually, where they're raising their money from, who were the likely lenders, and you want evidence of all of those things. And then you want to have a look at what the, that GDV that I mentioned, you what's that exit value. Well, is that a multiple sale of units? If so, what other units are being sold in the area? Go and take a look. I always go and look at a project that I'm going to be investing in or physically drive.

and have a look around, see what else is there. Is there any good news like the council are putting money into boosting the local area? Or you can look at using technology, you can see if there's a local plan, you could read the local plan and see what's going on there. So really, really important things. And then look at the timing, when are they going to sell? Are they selling off plan? How many units will come up? Is there going to be a flood or a glut of properties coming on the market? Or will it be done gradually?

You get the idea behind that. So, and usually I would involve a due diligence partner in that regard. I won't do that work myself because it's a bit too complicated. And also I like the idea and due diligence of having somebody else giving me a view. Right. So in the personal DD quite easy. As a matter of fact, when it comes to project DD, that's often a matter of opinion. I like to have other people's opinions that will give me their professional view.

I don't mind paying for that. Just as you pay for a surveyor, I have somebody more than one who will work with me on what's your view of this project? I have a view, but I want them to either help me ratify that view or alternatively say, did you consider this? Did you consider that? you learn every time you do DD because you get better.

Yeah, I like the process of separating it out with the people, the project itself. And I guess once those two are verified, only then do you really need to worry and start thinking about the paperwork.

Speaker 2 (12:38.51)
Yeah, the paperwork is legalities, okay? That's in the Waters formula, that's the structure. You know, what is the entity? Who are the parties that are engaging and how does that work? And I see a lot of joint ventures being struck by a handshake. That's not good. Handshakes can embed a relationship, but there's certainly no basis on which to do business. You never ever trust anybody to a handshake.

What you need is a clear documentation of the agreement, clear documentation of the expectations and clear documentation of who's going to do what and what are the consequences of all of these things. And that's a lawyer's job. And I'd say be mindful. There's a temptation, I think, and I see it a lot, where people, almost like doing a will from W.H. Smith or something, it just doesn't make sense to do something that's cheap and cheerful and make a mistake.

Because the whole point of doing something that's legal is to protect you in the event of the worst happening. So you want a robust legal document. So don't use a template. Don't use somebody else's document. Or if you do, make sure your lawyer has given you opinion on that. Because if somebody else has created a document for you, you can bet your boots that their lawyer was protecting them more than they're protecting you. So you need that balance of opinion.

So get advice, don't be afraid to pay for advice. Or if you know the win-win is there and that the outcome for the, let's say your lender and the developer is going to receive what they get, you've got the transparency of the GDV, you can agree that they pay all the legal fees. And certainly I do at all the legal costs associated with the transaction, even though I'm paying my own lawyer, but they foot the bill. So really important to do that and make sure you've got the security in place. Your exit strategies are all known.

all the expectations are mapped out and then secured by proper legal documentation. So hopefully that's a trot round, but literally nothing more than that, of the kind of critical touch points, the people, the project, and the paperwork.

Speaker 2 (14:50.552)
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