For construction companies considering a transfer of ownership, succession planning is a powerful process with tools that can ensure a smooth transition. But even the best-laid plans can go awry if the company hasn’t included one of their most important business partners, their surety.
As part of their succession planning, a construction company implemented a partial Employee Stock Ownership Plan (ESOP) which would support long-term employee retention. Their choice, however, triggered an unexpected outcome, namely their ability to retain their surety credit. ESOPs essentially create a large amount of debt that will be due either to the prior owners or to a bank. Although this debt was due to the former owner, who continued to lead the company, the surety saw the debt as a liability. They put new terms on the table and required personal indemnity. This had not been required previously due to the strength of the company relative to their bond needs, so this came as a surprise. The company found the new terms unacceptable and sought a new surety just as the need arose for a sizable bond. The resulting scramble to secure credit, under the pressure of a looming deadline, might have been avoided had the original surety been included in the succession planning.
Partners in Planning
While no amount of planning can predict every outcome, construction industry expert Todd Feuerman, of business consulting firm Ellin & Tucker, recommends construction companies partner with their surety on any changes that could significantly affect their balance sheet, and offers these suggestions for successful succession planning.
3 Ways to Include Your Surety in Succession Planning:
- Go Beyond Financial Forecasting – Any succession plan will include projected revenue after the transition, and a surety will be extremely interested in the integrity of these forecasts. Be sure to go beyond just debt service, worker agreements and revenue necessities and include possible financial implications that could impede the continued operational needs of the company.
- Facilitate Continuity – Any standing meetings with the surety should include key employees who are remaining in place after the transition. As experts in the company’s operational and financial plans, these employees can instill confidence and help forge relationships between the new ownership and the surety.
- Prioritize Expertise – Sureties want to know that once new ownership is in place, the company’s vendor connections, workforce and financial position will remain strong, and projects will continue to be completed. So, leadership should always think about the ways a firm could evolve beyond the transition and the specific areas of expertise that should be developed by any of the executives staying on board.
Feuerman’s final recommendation? “In order for owners to protect their ability to obtain or retain surety credit, they would be wise to treat their surety as a true partner.”