Succession is one of the most significant challenges facing construction businesses today. Successful contractors spend years building up their companies through their own blood, sweat and tears. When it comes time to step back, they want to know that the impressive legacy and reputation they have built will be perpetuated into the future. Of course, these same owners are also looking for the best mechanism to withdraw their hard-earned capital from their businesses so they can enjoy the fruits of their labour.
Often, the goal of successfully perpetuating a business can be at odds with also wanting to maximize the withdrawal of capital for retirement. To ensure this transition is a success, working closely with your stakeholders to ensure they are comfortable with the transition plan is critical. One of the partners that should be considered in this regard is your 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 parties are the new owner (“Purchaser”) and the exiting owner (“Vendor”). The third, in many cases, is the one that gets forgotten. This is the corporate entity itself. The new owner wants immediate control, while the old owner wants to be paid out. This combination can result in a heavily leveraged balance sheet that compromises the financial health of the corporate entity and can thus 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 needs 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 its 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 the 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 the former owner 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.
Indemnity — In many cases, the vendor will have personally signed an indemnity agreement with the surety. This means the owner could be personally liable in the event of a claim. At some point, the vendor will want to be released from this obligation and the bond company will likely want the new purchaser added as a personal indemnitor. It is very important to note when an indemnitor is released this is typically only for new projects moving forward. If, for example, the company secures a large multi-year contract two months before the vendor retires, the owner would still be considered personally liable for any issues on those jobs that results in claims against the bonds. As such, the timing of the release of the vendor from his indemnity obligations is a key consideration.
Our recommendation is to ensure that your surety broker and bonding company are included in the conversation early when considering any succession planning. They will be able to provide considerable guidance and support throughout the transition and can share best practices and lessons learned from past experiences. This will also ensure the new owners receive the same uninterrupted bonding support, keeping the legacy and reputation of the business intact.
Jamie Collum is the vice-president of construction for FCA Insurance. He has delivered numerous seminars and presentations on construction bonding and general industry updates in Ontario to various construction associations over the years. Andrew Cartwright is the vice-president of surety for FCA Insurance. Andrew recently joined FCA after a decade long tenure as RVP for a large national surety company.
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