Surety Bonds: Navigating Succession with your Bond Company
Succession is one of the most significant challenges facing construction businesses today. Owners want comfort that their legacy will be perpetuated into the future. In addition, owners are also looking for the best mechanism to withdraw capital for retirement and the next stage of their lives.
Part of ensuring the success of any transition is making sure the bonding company remains comfortable with the business. This will ensure that the new ownership group will continue to have the support they need to achieve their goals while also ensuring that profitability can be maintained to pay off the previous owners and any acquisition debt.
This becomes particularly important when part of the purchase is tied to a vendor take back (“VTB”) and is not fully financed by third party debt. In many cases, the former owners remain at risk as these VTB’s are payable over several years. A significant shift in the ability to obtain bonding could jeopardize these payments for the previous owners.
To navigate these challenges successfully you need to look at perpetuation from the perspective of the bonding company. In many cases, what owners of construction firms forget is that you need to look at the three parties in any succession plan and align the goals and objectives of each. The two most obvious are the new owner (“Purchaser”) and the exiting owner (“Vendor”).
The third, in many cases, it is the one that gets forgotten. This is the corporate entity itself. The new owner wants immediate control, the old owner wants to be paid out and this combination results in a heavily leveraged balance sheet which compromises the health or the corporate entity which can then impact the contractor’s bonding facility.
It is important to remember the following things when considering any succession plan:
- Relationship – in almost any succession plan / sale, the balance sheet and the capital picture of the corporate entity is likely to look weaker. As a result, the focus on relationship and the bonding company’s comfort with the transition plan become even more paramount. For owners, identifying high performing individuals in the business with potential for succession early is important. Introducing them to the bonding company over time to foster that relationship will also build comfort and rapport with the eventual transition. Ultimately, discussing your succession plans early and being proactive with your bonding company and broker will help make this transition as smooth as possible.
- Capital – as mentioned earlier the corporate entity is the one party often forgotten in any transition plan. How the deal is structured from a debt and capital structure standpoint need to align the interests of the vendor, purchaser and the corporate entity. To do this successfully, some level of capital should be retained in the business in the short term to allow the business to execute it plans and build up retained earnings after the completion of the sale.
- Knowledge – the bonding company will often have significant comfort in the exiting ownership group. While they new owners may have strong experience it will be their first time effectively running and owning this business. The vendor will have significant institutional knowledge that can act as a resource for the new ownership group. As a result, having former owner’s stay on in an advisory role is often helpful not only in building comfort with the bonding company but also in helping the purchaser build their knowledge of the business from an ownership standpoint.
- Surety Broker – if you have a strong surety broker they should be knowledgeable in succession and will have significant experience helping contractors navigate these discussions with their bonding company. Involve your broker early in these discussions and lean on them for their expertise in ensuring this is a smooth transition with your bonding company.
As always, please reach out to the team at FCA Surety with any questions.